The Ninth Circuit Rewrites Hawaii's Deceptive Practices Act To Facilitate Class Actions by Eliminating Reliance/Causation and Most Defenses
The Ninth Circuit’s recent decision in Yokoyama v. Midland National Life Insurance Company, 2009 WL 2634770 (9th Cir. Aug. 28, 2009) reflects a fundamental misunderstanding of consumer fraud class actions and – if left untouched by the full panel on rehearing – threatens to do great mischief not only to Hawaii law, but to the law of other jurisdictions as well.
In Yokoyama, three senior citizens sued on behalf of a putative class of Hawaii residents who bought indexed annuity products. They alleged that the defendant failed to adequately disclose in its brochures the risks associated with such products, and they thus alleged violations of Hawaii’s Deceptive Practices Act, Haw. Rev. Stat. sec. 480-2.
The district court had refused to certify the class, determining that Rule 23(b)(3) applied because the request for money damages predominated, and holding that the proposed class failed that rule’s predominance requirement because each class member would have to establish that he or she was actually misled and damaged thereby, as well as the amount of his or her damages. See Yokoyama v. Midland Nat’l Life Ins. Co., 243 F.R.D. 400 (D. Haw. 2007).
In reversing the district court, the Ninth Circuit articulated – allegedly for the first time – that its standard of review when reviewing a trial court’s conclusion on an issue of law in the class certification context is de novo review. Then, it held that the trial court erred because under Hawaii’s DPA, the class members did not have to prove that they relied on any deceptive statement, but only that the statement had a “tendency to deceive.” Moreover, the court held that there was no need to inquire into what the brokers orally communicated to the senior citizens; the sole issue was whether the brochures “were capable of misleading a reasonable consumer.” Finally, the court held that the need to calculate damages for each class members could not defeat class certification.
The sweeping effect of the Yokoyama Court’s re-write of Hawaii law is truly stunning: apparently no class member – not even the named plaintiff – has to establish that he or she relied on a misrepresentation or that it in any way caused his or her injury in order to bring a damages claim under Hawaii’s DPA. Not even the California has gone so far, divorcing the alleged misrepresentation entirely from any notion of reliance or causation for damages claims. Notably, the Yokoyama Court reached this conclusion by citing two Hawaii Supreme Court decisions that were wholly inapposite on these issues.
The Yokoyama Court seemed to have no concept for how these products were actually sold. As the district court had explained, the annuities were sold by independent brokers with different backgrounds and levels of training. They gave different oral presentations and created on their laptops unique written materials for their customers based on the information the customers provided. These interactions resulted in the customers’ different choices about which annuities to buy, what index or crediting method to select to achieve the best tax benefits, and how much to invest.
The bottom line is that – as part of these oral interactions – some portion of the putative class members were actually advised of the risks that may not have been mentioned in the brochures, and others were actually benefited and achieved their financial goals:
“Because some independent brokers did disclose, discuss, clarify, or explain the relevant provisions to individual consumers – even putting ‘worst case scenarios’ into writing – an individual inquiry is required to determine the impact of the oral presentation upon each investor, the behavior of the independent broker, and the nature of the relationship between each individual annuitant and his or her independent broker.”
243 F.R.D. at 408-09.
The Yokoyama Court’s opinion would allow people who were not deceived and who were not damaged to recover damages. This is not only unfair; it makes absolutely no sense. It also contradicts the express language of Hawaii’s statute:
“Any consumer who is injured by an unfair or deceptive act or practice forbidden or declared unlawful by section 480-2: (1) May sue for damages sustained by the consumer . . .”
Haw. Rev. Stat. sec. 480-13(b).
Hawaii’s statute expressly requires causation: if the allegedly deceptive act does not result in injury and damages, Hawaii citizens cannot recover under the statute. The Yokoyama Court far exceeded the boundaries of the federal judiciary when it effectively re-wrote the legislature’s statute. It also seemingly forgot that Rule 23 is a procedural rule that is not intended to rewrite substantive law; in a class action, defendants must be allowed to present the same defenses to individual claims that they would have presented if the claims were brought individually. The Yokoyama decision deprives the defendant of that right.
The court’s canard about damages not precluding certification also was overly simplistic. That principle is applied in cases, like some securities class actions, where the calculation of damages is simplistic. (E.g., plaintiff held X shares of stock, and the loss was Y dollars per share, so the damages were X x Y.) But where, as in this case, even calculating the damages requires a highly individualized inquiry, courts frequently deny certification.
There can be little doubt, to those who know annuities, that calculating damages in the Yokoyama class action certified by the Ninth Circuit would be far from formulaic:
“[T]he amount of damage sustained by a single class member would depend on factors such as the financial circumstances and objectives of each class member; their ages; the [annuity plan] selected; any changes in the fixed interest rate for that [annuity plan]; the performance of the selected index; any changes in the index margin for that particular [annuity plan]; any cap on the indexed interest; the length of the surrender periods; whether the individual had undertaken or wanted to undertake an early withdrawal of funds; any benefit the individual policy holder derived from the form of the annuity itself, including the tax deferral of credited interest; and the actual rate of return on the [annuity plan].”
243 F.R.D. at 410-11.
If Yokoyama stands, other courts will be tempted to read the reliance and/or causation provision right out of the text of other states' deceptive trade practice statutes. The specter of "damages" -- untethered to any concept of actual deception causing subsequent concrete financial injury -- would make the resulting class actions dangerous weapons for coercing settlements with no relation to actual harm, if any.
