District Judge David H. Coar has issued an important opinion analyzing Rule 23(b)(3)'s superiority requirement in the context of recalled products with manufacturer-sponsored refund programs.
In In re Aqua Dots Prods. Liab. Litig., 2010 WL 3927611 (N.D. Ill. Oct. 4, 2010), Judge Coar was the MDL transferee faced with 14 putative class actions that were brought in the wake of Spin Master's recall of its Aqua Dots toys. Aqua Dots, you may remember, are small, brightly-colored beads that fuse together when sprayed with water. In 2007, Spin Master discovered that they had been manufactured with the wrong adhesive -- one that was converted by the human body into the illegal drug gamma-hydroxy butyrate (GHB, known as the "date rape drug") when ingested. In conjunction with the CPSC, Spin Master voluntarily recalled approximately 4.2 million Aqua Dots products on November 7, 2007. Of those, over 1,300,000 had been sold to consumers.
The recall was all over the news, and retailers like Wal-Mart, Target and Toys "R" Us collected the toys and issued refunds. In total, roughly 600,000 products were returned -- usually for a refund, although some consumers accepted a free replacement toy. The recall/refund offer for the affected Aqua Dots products remains available to this day, and there was no evidence that anyone was denied the right to return an affected product for a refund.
Despite the success of the recall/refund program, Spin Master was hit with so many putative class actions that an MDL was formed. The cases generally fell into three groups. One wanted a nationwide class for alleged violations of reporting requirements under the federal Consumer Product Safety Act. There were nine single-state classes asserting state-law claims of unjust enrichment, breach of express and implied warranties, and violations of state consumer protection statutes. And there was an unjust enrichment class seeking four subclasses composed of groupings of states with materially identical requirements. Apparently each class also wanted punitive damages and/or treble damages and declaratory or injunctive relief.
Judge Coar began his analysis with the superiority requirement because he found that it ended the inquiry. The initial question was a legal one:
A threshold legal question is whether a defendant-administered refund program may be found to be superior to a class action within the meaning of Rule 23(b)(3), which permits the court to certify a class only if it finds, among other things, that "a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."
Id. at *3.
As Judge Coar explained, the cases on the question are split between the "textual approach" -- which holds that the term "adjudicating" precludes consideration of non-judicial alternatives -- and the "policy approach" -- which focuses on the efficiency purpose of the inquiry thus asks whether nonjudicial remedies may obviate the need for court involvement. Id. The court undertook a thorough examination of the precedents supporting the policy approach (going back to 1967), and it sided with them, concluding that "when a defendant already is offering an effective remedy for putative class members through out-of-court channels, a class action threatens to consume substantial judicial resources to no good end." Id.
Judge Coar grounded much of his opinion in Thorogood v. Sears, Roebuck & Co., 547 F.3d 742 (7th Cir. 2008), observing that by ensuring that the class action is premised on the realistic prospect of a remedy that the class members could not otherwise obtain, the court is also protecting the interests of absent class members, who may have different interests than those of class action lawyers who want to obtain a fee for providing the same or similar relief. Aqua Dots, 2010 WL 3927611 at *5. The court even noted that none of the named plaintiffs in the case before it had requested a refund from the defendant, and that class counsel had expressly advised one such plaintiff not to do so. The court concluded:
At bottom, this is a suit to recover the purchase price of tainted Aqua Dots. Since the defendants will provide a refund -- without needless judicial intervention, lawyer's fees, or delay -- to any purchaser who asks for one, there is no realistic sense in which putative class members would be better off coming to court. From their perspective a class action is not the superior alternative. The court therefore declines to certify any of the proposed classes.
Id. at *7.
Judge Coar also had some important things to say about unjust enrichment class actions, which he said were "fraught with procedural and choice of law problems that further preclude certification." Id. Even with the subclassing proposed by the plaintiffs, Judge Coar concluded that the classes were unmanageable because the legal rules simply were not identical:
Furthermore, the unjust enrichment subclasses pose insurmountable choice-of-law problems. As other members of this court have pointed out, the law of unjust enrichment varies too much from state to state to be amenable to national or even multistate class treatment.
Id. at *8. He gave a number of examples, and then concluded that it was "emphatically not the case here" that the subclasses were governed by the same legal rules, "and any attempt by the court to tinker with the composition of the subclasses to satisfy this requirement would be futile anyhow." Id. at *10.
Judge Coar's decision should give encouragement to defendants who -- faced with the need to recall a product -- do the right thing and implement a robust recall and replacement program. His opinion would suggest that the more that you can document how successful your recall was -- and promote the ease of obtaining the refund for all class members -- you may have a substantial defense to so-called "economic loss" class actions that ordinary defendants simply do not possess.