We have repeatedly discussed in this space the ongoing debate among the federal courts about ascertainability—a red-hot topic in class action litigation these days. (For a more detailed look at our views on the ascertainability doctrine, see the amicus brief (pdf) that we filed on behalf of the National Association of Manufacturers in support of a pending cert petition.) That topic—and the debate among the lower courts—shows no sign of slowing down, as evidenced by new decisions issued by the Second, Sixth, and Third Circuits over the past two months. The central takeaway from these decisions is that while ascertainability is not a panacea for defendants facing consumer class actions, the doctrine (or variations on the ascertainability theme) should help defeat class actions in many circuits when class members cannot be identified without individualized inquiries.
Can you have a class action if class members can’t reliably be found? That question is at the heart of the debate over ascertainability—one that has divided the federal courts. Earlier this week, the Ninth Circuit weighed in, holding in Briseno v. ConAgra Foods, Inc. (pdf) that plaintiffs need not demonstrate “an administratively feasible way to identify class members [as] a prerequisite to class certification.”
That conclusion is disappointing.
We’ve often argued that when the principal rationale for approving a low-value class settlement is that the claims are weak, that is a signal that the case should not have been filed as a class action in the first place. The Second Circuit recently reached that exact conclusion when considering a proposed class settlement in a Fair Debt Collection Practices Act (FDCPA) case, holding that the putative class couldn’t be certified and that the FDCPA claims should be dismissed.
Congress and state legislatures have enacted many statutes that provide for minimum statutory damages recoveries that are far in excess of the actual damages most individuals will suffer. A prominent example is the Telephone Consumer Protection Act (TCPA), which offers $500 per violation of the statute, trebled to $1500 for willful violations. The idea is that offering such damages will create incentives for individual plaintiffs to pursue such claims in court when actual damages are minimal or difficult to measure. But the numbers can quickly add up when such statutory damages claims are aggregated as part of a putative class action. By the simple expedient of cutting and pasting standard class allegations into their complaints, plaintiffs’ lawyers can transform a $500 claim into one for $500 million. (For fans of the Austin Powers movies: Insert Dr. Evil impression here (or take a look at this clip).)
For good reasons, defendants find this phenomenon troubling, to say the least. My colleagues and I have argued in a pair of articles (here and here) that courts should refuse to certify class actions when the claims involve statutory damages. It is hard to believe that when Congress enacted laws providing for statutory damages, it intended to hand private plaintiffs (and their counsel) the ability to threaten massive liability—perhaps even bankruptcy—for often relatively minor or technical violations of a statute, especially when, as is common, the actual harm is minor or speculative.
That said, these arguments have met with mixed success in the courts. But a recent Supreme Court opinion issued earlier this week, Maracich v. Spears, No. 12-25, could provide defendants with new hope.
In Maracich, the Court held that attempts by lawyers to solicit clients did not qualify for the “litigation exception” to the Driver’s Privacy Protection Act of 1994 (DPPA). In an ironic twist, a group of plaintiffs’ lawyers had themselves become defendants in a class action. In order to solicit new plaintiffs for lawsuits against certain auto dealers, these lawyers had obtained personal information about customers of those auto dealers from the state DMV. Some of the customers didn’t like it, including one who happened to work for a defendant auto dealer. These customers sued the plaintiffs’ lawyers in a class action, alleging violations of the DPPA.
By a 5-4 vote, the Court held that soliciting clients doesn’t count under the DPPA’s litigation exception. We summarize that holding elsewhere. But to me the most interesting takeaway from Maracich is what the decision has to say about statutory damages.
Justice Ginsburg’s dissent expressed a concern with “astronomical liquidated damages”; the customers “sought $2,500 in statutory damages for every letter mailed—a total of some $200 million—and punitive damages to boot.” As she put it, “such damages cannot possibly represent a legislative judgment regarding average actual damage.”
In response, Justice Kennedy’s majority opinion recognized that the Court was leaving open two questions about the appropriateness of such massive awards. First, “[w]hether the civil damages provision in [the DPPA], after a careful and proper interpretation, would permit an award in this amount”—in other words, as a matter of statutory interpretation, did Congress intend to allow such enormous liability? Given the DPPA’s express language allowing individual claims for $2500, that question boils down to whether courts should assume that Congress intended to allow class actions that transform a $2500 claim into lawsuits for $200 million. Second, if that is what Congress intended, “whether principles of due process and other doctrines that protect against excessive awards would come into play.”
To be sure, the Court did not answer those questions; as Justice Kennedy pointed out, they were not “argued or presented in” Maracich. But it now seems clear that at least some Justices are open to the possibility that when class actions exponentially increase potential liability in statutory damages cases, such “astronomical” damages may violate constitutional limits.
Accordingly, businesses (and the lawyers who represent them) should read Maracich as extending an invitation to challenge class actions for statutory damages. Specifically, when businesses face class actions for massive damages under federal or state statutes—including the TCPA, Fair Credit Reporting Act, or some state consumer-protection statutes—they should consider arguing that class actions are not a superior method for adjudicating the statutory claims because the potential for extraordinarily massive liability imposes excruciating (and improper) pressure on defendants to settle, raising serious due process concerns.
The Fair Debt Collection Practices Act (FDCPA), which regulates the conduct of debt collectors, authorizes plaintiffs suing over violations to recover statutory damages of up to $1,000. Because these amounts can rapidly add up to exorbitant numbers in a class action for very minor, technical violations, Congress capped the total amount of statutory damages that may be sought for the absent class members in a class action at the lesser of $500,000 or 1 percent of the debt collector’s net worth. 15 U.S.C. § 1692k(a)(2)(B).
Now imagine that you’re a plaintiff’s lawyer who has stumbled across what appears to be a very widespread FDCPA violation committed by a national debt collector—say, an error in the standard dunning letter sent to debtors across the country. Why would you ever file a single nationwide class action in which the class recovery tops out at a half- million dollars (or less, depending upon the defendant’s assets)—which means that your fees in a settlement effectively would be capped at a third or a fourth of that amount—when you can file dozens, fifty, or a hundred smaller class actions in which you could recover the same amount in each case?
Of course, any such maneuver would be a transparent evasion of FDCPA’s cap on aggregate statutory damages. And it would frustrate Congress’s goal of protecting debt collectors from being bankrupted by FDCPA class actions. Nonetheless, in LaRocque v. TRS Recovery Services Inc., No. 2:11-cv-91-DGH (D. Me. Jan. 2, 2013), a district court held that the nothing in the FDCPA prevents plaintiffs from atomizing their class actions in order to recover the statutory cap in a series of individual suits.
In LaRocque, the plaintiff—or perhaps her granddaughter, who was a paralegal at a FDCPA class action firm—noticed that a debt-collection letter she had received regarding a bounced check arguably violated the FDCPA. The plaintiff then filed a class action on behalf of a putative class of recipients of similar letters in Maine, and—after that class was certified—filed state-specific class actions in four other federal courts. In the case in Maine, the defendants moved to expand the Maine-only class into a nationwide class, arguing that allowing the plaintiffs to pursue a series of single-state classes would circumvent the FDCPA’s cap on statutory damages.
The court denied the request, noting that FDCPA’s cap on statutory damages is phrased differently than the later-enacted cap in the Truth in Lending Act, which specifies that the cap applies “in any class action or series of class actions.” 15 U.S.C. § 1640(a)(2)(B) (emphasis added). Previously, the Seventh Circuit also had concluded that FDCPA’s damages cap doesn’t require plaintiffs to seek certification of a nationwide rather than a single-state class. Mace v. Van Ru Credit Corp., 109 F.3d 338 (7th Cir. 1997). But in that case, the Seventh Circuit observed that its holding might have to be revisited if a plaintiff ever actually brought “multiple or serial class actions to recover for the same misconduct.” Id. at 344. The district court in LaRocque, however, declined to analyze the issue substantively because other district courts presented with it hadn’t done so either.
So what should a defendant do if targeted by a wave of small class actions designed to avoid FDCPA’s cap on total damages in a class action? One approach would be to raise the issue that the Seventh Circuit left undecided in Mace and argue that the FDCPA should be read to bar plaintiffs from evading it by subdividing nationwide or multi-state class actions into a series of smaller class actions. Indeed, otherwise nothing would stop plaintiffs from bringing a separate class action for the smallest number of people that would satisfy the numerosity requirement. This tactic brings to mind Chief Justice’s hypothetical during oral argument in Standard Fire Insurance Co. v. Knowles—the case on whether plaintiffs can avoid removal under CAFA by stipulating that the class recovery would be less than the $5 million amount-in-controversy requirement—of a lawyer filing one class action for people “whose names begin with A to K” and another for “people whose names begin L to Z.”
Alternatively, the defendant could reframe the argument as a challenge to the superiority of an artificially small class action. Rule 23(b)(3) permits class certification only if the proposed class “is superior to other available methods for fairly and efficiently adjudicating the controversy,” and requires the court to consider (among other things) “the extent and nature of any litigation concerning the controversy already begun by or against class members” and “the desirability or undesirability of concentrating the litigation of the claims in the particular forum.” Fed. R. Civ. P. 23(b)(3)(B)-(C). In a FDCPA class action, litigating a wave of mini-class actions would be less efficient than a single nationwide class action and would increase the defendant’s liability—perhaps by 50 times or more—in ways that Congress did not intend.
If neither of these approaches succeeds, a defendant could argue that the court should exercise its discretion under FDCPA to reduce the amount of statutory damages awarded in consideration of the size of the class and the pendency of actions in other jurisdictions.
The requirement that the named plaintiff must be an adequate class representative is not often the basis for denying class certification. But a recent decision from the Northern District of Illinois in a false-advertising class action illustrates the importance of taking discovery on facts that are relevant to the adequacy standard.
In Lipton v. Chattem, Inc., the district court denied class certification in a case alleging that purchasers of a weight-loss product, Dexatrim, had been deceived because the label did not disclose that its ingredients included hexavalent chromium, which allegedly can cause serious health problems. The court held that the named plaintiff, Tracy Lipton, was not an adequate class representative because her deposition testimony made her subject to a potential defense not applicable to the class as a whole: she admitted that she had not heard of hexavalent chromium at the time of her purchase and that, even if the label had listed hexavalent chromium as an ingredient, she would have bought Dexatrim anyway. These admissions, the court explained, posed a “serious problem” for Lipton’s claims because a jury could easily find that she had not proved materiality and causation (elements of the fraud and statutory consumer-protection claims), reliance (an element of the fraud claim), or a connection between the alleged detriment to her and the alleged benefit to the defendant (a requirement for the unjust-enrichment claim). Those obstacles to proving a claim presumably would not exist for putative class members who knew what hexavalent chromium was or who would not have bought Dexatrim if it had been listed as an ingredient. The court stressed that it did not need to find that a jury would find against Lipton; it held that Rule 23(a)(4)’s adequacy requirement is not satisfied if a jury might find against the plaintiff on grounds not applicable to the class as a whole—the defense need only be “arguable” to defeat class certification on adequacy grounds. The court went on to note that the same potential defenses meant that common issues did not predominate over individual issues and that a class action was not superior to other methods of adjudicating the controversy. In particular, Lipton had not offered “any practicable way” for the court to efficiently resolve key liability issues “without conducting hundreds or thousands of mini-trials”—the same point the Seventh Circuit made with respect to individual damages issues in the Espenscheid case we recently discussed.
Lipton demonstrates why it is essential to question proposed class representatives carefully in depositions; the facts elicited may well reveal that they are subject to individualized defenses that may not apply to some members of the putative class. And sometimes the allegations of the complaint alone will indicate the same thing. In that instance, a defendant can use one of our favorite devices for defeating class certification without discovery—a motion to strike the class allegations. Finally, Lipton and Espenscheid both highlight that defendants faced with potential individualized issues in the case should emphasize the practical difficulties of resolving those issues in a single proceeding; if even one issue cannot be decided without hundreds of mini-trials for each class member, the case should not be certified in the first place.
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.
The answer is a resounding “no,” says Judge Cormac Carney of the Central District of California in a recent significant decision in litigation over the third generation Toyota Prius and 2010 Lexus HS250h vehicles (In re Toyota Motor Corp. Hybrid Brake Mktg., Sales Practices & Prods. Liab. Litig. (pdf), No. SAML 10-2172-CJC (C.D. Cal. Jan. 9, 2013).
Judge Carney is presiding over a multidistrict litigation (consolidating five class actions) against Toyota, in which the plaintiffs allege that a defect in the Prius’s anti-lock brake system (“ABS”) causes increased stopping time and distance when a driver hits the brakes.
The court identified a variety of flaws with the proposed class action, but “most problematic” was the fact that a “substantial majority” of the class members had “never suffered an actual injury that was caused by a manifest defect in the ABS.” In part, that was because Toyota established that it had recalled the vehicles in response to customer concerns and installed updated software that effectively resolved the brake feel issue. Thus, the court concluded that the class could not be certified.
Notably, as part of its denial of class certification, the court also rejected plaintiffs’ argument that they suffered an injury because they would not have paid the same purchase price for their vehicles if they had known of the ABS issue. Some courts have accepted a similar “premium price” or “benefit of the bargain” theory. But Judge Carney observed that “merely offering a creative damages theory does not establish the actual injury that is required to prevail on [plaintiffs’] product liability claims.” The court explained that as a result of the recall and software fix, the majority of the class members “received exactly what they paid for”—a vehicle with brakes that operated without incident—and incurred no financial loss whether through resale or repair costs.
In its decision, the court explained that, although a small proportion of the proposed class may allege actual injury (in the court’s view) because of an ABS issue prior to the recall, determining which of many possible factors caused any such harm “would require highly individualized, fact-intensive inquiries” not suitable for a class action. Judge Carney rejected the notion that “a class of thousands” should be certified where only a “few suffered an actual injury that resulted from a manifest defect in the ABS.” Such a class action, he concluded, would not be “a superior, fair, and efficient method for resolving the parties’ controversy.”
This decision is a significant one—particularly so in light of the court’s rejection of plaintiffs’ premium-price theory. It provides a welcome counterpoint to a decision by the Sixth Circuit (in a case against Whirlpool) and a decision by the Seventh Circuit (in a case against Sears) appearing to accept a similar theory—which, if it gains broader currency—could threaten to usher in a new wave of product-defect and warranty class actions premised on oddball alleged defects that few purchasers experience. Like Judge Carney in Toyota—and the Eleventh Circuit in Walewski, which we recently reported—courts should recognize that purchasers of products that perform as intended have gotten precisely what they paid for and therefore have no claim against the manufacturer or retailer. Enrolling those satisfied purchasers in vast litigation classes can only impose unwarranted costs on manufacturers and retailers and ultimately drive up prices paid by consumers.
The Second Circuit’s recent decision in Hecht v. United Collection Bureau, Inc., No. 11-1327 (2d Cir. Aug. 17, 2012), should sound alarm bells for any business that attempts to settle a class action. The takeaway from the decision is to make sure that notice of the settlement to absent class members is adequate. Under some circumstances, a single notice in the USA Today won’t cut it. And if it doesn’t, the release in the settlement won’t be worth the paper it’s printed on, and other plaintiffs will be free to bring the exact same class action against you.
We recently reported on a class settlement in which no members of the class submitted claims. The plaintiffs in that case contended that the defendant violated the Electronic Funds Transfer Act (EFTA) by failing to post a notice on its ATMs that consumers would be charged a fee for using the machines.
More recently, in another case involving the same kind of alleged violation, Ballard v. Branch Banking & Trust Co. (pdf), Judge Ellen Huvelle of the U.S. District Court for the District of Columbia refused to certify a class, concluding that, under the circumstances, a class action failed Rule 23(b)(3)’s superiority requirement.
It’s pretty clear that Judge Huvelle saw Ballard as a lawyer-driven class action. She pointed out in the statement of facts that the named plaintiff was not a true victim. Instead, he was sent to the ATM in question by his lawyer, who had informed him that the ATM lacked the requisite notice on the face of the machine, and he made a withdrawal after receiving actual notice of the fee on the display screen, in order to “collect evidence.” Perhaps influenced by the fact that the plaintiff suffered no true injury, Judge Huvelle held that a class action is not a superior means of resolving the dispute, explaining: “[I]t is undisputed that each of the prospective class members proceeded with the transaction despite having received the required notice on the screen and that the potential class recovery will be de minimis, especially in comparison to the petition for fees and costs that will ultimately be filed after lengthy and costly litigation.” Indeed, she reasoned, “the likelihood of de minimis damages [if the case is pursued as a class action] may make it preferable for consumers to litigate their claims as individual actions, for which the minimum recovery is $100.”
Congress has taken note of the growing cottage industry of EFTA lawsuits against banks challenging the lack of a physical notice of fees on ATMs when the ATMs provide on-screen notices. On July 9, 2012, the House passed H.R. 4367 (pdf), which would require banks to make fee disclosures required by EFTA on the ATM screen alone. The bill is now pending in the Senate, where it has attracted a growing number of co-sponsors. The House committee report (pdf) provides useful background about the abuses of EFTA–some truly egregious–that are motivating the legislation.