Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

It's not often that you find a Supreme Court Justice commenting on mass tort class actions.  But on Tuesday, retired Justice David H. Souter sat by designation on the First Circuit and issued an opinion in Gintis v. Bouchard Transp. Co., 2010 WL 617395 (1st Cir. Feb. 23, 2010).  Of course, if you read this blog, you remember Gintis:  it was part of the competing class actions that arose out of an oil spill in Buzzards Bay that I posted about previously.  The District Court ultimately denied class certification of a public nuisance class because the individualized issues of "special injury" and damages predominated over the common issues.

On appeal, Justice Souter reversed the decision below because the trial court did not engage in a rigorous analysis of whether the class certification requirements were met.  As Justice Souter characterized the opinion below, it "listed the elements to be proven by evidence that ultimately must speak to individual claims, and cited one precedent example among cases going different ways."  Id. at *2.

Although Justice Souter did not dictate what the outcome should be on remand, it was clear that he believed a class should be certififed.  Noting the defendant's objection to the use of its records and its challenge to the plaintiffs' expert's appraisal methodology, he posited that the defendant's "arguments in this appeal appear to show that substantial and serious common issues would arise over and over in potential individual cases."  Id. at *3.  He opined that with likely recoveries being between $12,000 and $39,000, and the defense challenging injury, causation, and compensation, this may be one of those cases "that may well go to the very reason for Rule 23(b)(3), mentioned before (i.e., to make room for claims that plaintiffs could never afford to press one by one)."  Id.

You may remember that the District Court's decision had raised an interesting question:  what is the preclusive effect of the state court's refusal to certify a broad class of property owners all over Buzzard's Bay?  (Instead, it certified a much smaller class of property owners from one small town.)  Justice Souter relegated that question to a footnote:  "that judgment has no prelusive effect against these plaintiffs, who were neither parties to the state action nor in privity with those who were."  Id. at n.2.

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A recent decision of the Southern District of New York reminds us that even where the subject of the suit is a standardized contract, there can still be individual issues that preclude class certification.

In Spagnola v. Chubb Corp., 2010 WL 46017 (S.D.N.Y. Jan. 7, 2010), some insureds sued their insurer, Great Northern Insurance Company, along with two related insurers over policies that allegedly were supposed to increase coverage daily to reflect the current effect of inflation. Plaintiffs claimed that the insurers left them underinsured and sued under a variety of theories.  The district court previously had dismissed all of the causes of action, and the Second Circuit had affirmed dismissal of all but the breach of contract count -- to the extent that it was based on the increase in coverage and premiums in a way that did not reflect current property costs and values.  Id. at *2. The Second Circuit also had instructed that the voluntary payment doctrine -- which precludes a plaintiff from recovering for payments made with full knowledge of the facts -- was not ripe to support dismissal as pled here at the motion to dismiss stage.

On remand, Judge Harold Baer, Jr. considered two basic questions:  (1) could plaintiffs maintain suit against the "related" companies, and (2) should it grant the defendant's motion to deny class certification.  

Plaintiffs' policies were written by a subsidiary of the Chubb Corporation.  In addition to their insurer, Plaintiffs sued Chubb and its largest subsidiary, Federal Insurance Company, which allegedly manages the other Chubb subsidiaries.  Of course, plaintiffs were asserting a breach of contract theory only at this point, and they had a contract only with Great Northern; neither Chubb nor FIC were signatories to the policies.  Judge Baer thus considered whether plaintiffs had adequately alleged alter ego liability or an agency theory to keep the two non-signatory defendants in the case.  

Although plaintiffs pled a credit agreement that considered Chubb and its subsidiaries as a whole, as well as the overlap of senior management, officers and directors, and advertising that refers to the "Chubb Group," the court held that it was insufficient to pierce the corporate veil:

Although Plaintiffs have alleged facts to suggest some overlap between the operations between Chubb and its subsidiaries, this overlap is not unusual and Plaintiffs' allegations do not rise to the level that indicates the kind of complete domination and control that is required under the first prong of the alter-ego analysis.  Indeed, courts routinely refuse to pierce the corporate veil based on allegations limited to the existence of shared office space or overlapping management, allegations that one company is the wholly-owned subsidiary of another, or that companies are to be "considered as a whole."

Id. at *7 (citation omitted).

In considering the agency theory, the court held that plaintiffs had pled no facts establishing that Chubb or FIC had actual authority to act as Great Northern's agent.  However, the court held that plaintiffs had pled enough facts to keep Chubb in the case at the motion to dismiss stage on the issue of apparent authority: 

Specifically, Plaintiffs have alleged that the cover letter enclosing the policies bore the Chubb trademarked logo; that an integrated advertising and marketing campaign relating to the Policies referred only generally to "Chubb"; that insureds under the Policies were directed to make all inquiries to Chubb and to make payments "payable to Chubb."  The Court agrees with Plaintiffs that they have thus sufficiently alleged that insureds could have reasonably believed that they had contracted with Chubb and not Great Northern, notwithstanding the express terms of the policies.

Id. at *10.  The court, however, dismissed the complaint against FIC because no such evidence was pled against it.

In considering the defendant's motion to deny class certification, the court held that the plaintiffs had satisfied the elements of commonality and typicality, but they failed the elements of adequacy of representation, predominance and superiority.  For some of the policies, the insurer bore the risk of underinsurance, but for others, that risk was borne by the insured.  Plaintiffs, who held policies where the insurer bore the risk, could not be expected to adequately represent the interests of those with policies where they bear the risk of loss.  Moreover, one of the plaintiffs had purchased his policies outside the defined class period and was a close personal friend of class counsel.  Accordingly, the adequacy of representation element was not satisfied.

In analyzing predominance, the court concluded that the class members' claims were not capable of classwide proof, but would require an analysis of individual issues, including:

the unique characteristics of each class member's home, whether each policyholder's coverage was actually increased using CPI or some other guideline, the amount of the increase, whether the policy requested that the increase be waived or revalued, and actual replacement cost of each policyholder's home.  Compounded with these individual questions is the lingering concern relating to the potential unique defense of voluntary payment, among others.  Ultimately, the Court or the jury will be tasked with the determination, for each individual class member, whether they knew or should have known of the circumstances surrounding the increases in their respective coverages but continued to pay, or whether such payment was the result of a mistake of fact or law relating to their obligation to pay.

Id. at *19.  Accordingly, the predominance requirement of Rule 23(b)(3) was not met.  Similarly, the need for individual mini-trials to resolve class members' claims and the affirmative defense of the voluntary payment doctrine made the class action fail the superiority requirement as well.

The decision in Spagnola is a clear-eyed analysis of how claims relating to standardized contracts can nevertheless involve individual issues that make classwide adjudication impossible.

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I knew it was too good to be true.  A few months ago I posted about a decision from the Arkansas Supreme Court that affirmed dismissal of a deceptive trade practices claim because it fell within a safe harbor of regulatory approval.  At the time, I asked if there had been a sea-change in Arkansas class action jurisprudence.  Today, I'm sad to report that the answer is "no."

If there's one thing I learned growing up in Southwest Missouri, it's that everything is just a little bit different in Arkansas.  (Even my friends from Rogers, Arkansas concede as much.)  Apparently that principle goes double for class actions.

At a time when the Supreme Court, most federal Circuit Courts of Appeal, and many state supreme courts have held that due process requires a rigorous analysis of how a case is actually going to be tried before a class can be certified, Arkansas continues to instruct its trial courts to retreat from any sort of reality that touches upon the substantive elements of a claim.  See Rosenow v. Alltel Corp., 2010 WL 199247 (Ark.  Jan 21, 2010).  

In Rosenow, a customer sued his mobile phone service provider for damages allegedly resulting from the early termination fee in its standardized customer contract.  Plaintiff asserted on behalf of those who paid the early termination fee a putative statewide class action for violation of Arkansas' Deceptive Trade Practices Act and for common law unjust enrichment.

The trial court rejected class certification, holding that although a number of elements of Rule 23 had been met, the commonality, predominance and superiority requirements were not met.  In doing so, the trial court had relied upon the defense expert's testimony that determining whether the early termination fee (i.e. liquidated damages provision) was a reasonable approximation of the defendant's damages would be an individualized inquiry that would make the class unmanageable.

The Arkansas Supremes reversed, articulating a theory of class actions that is just a little bit different than anywhere else.  According to the Arkansas Supremes, so long as there are common issues, the class should be certified for trial of those issues even if it must later be bifurcated into a second phase of individual trials over things like damages, and in deciding whether the class action prerequisites are met, courts should not inquire into defenses to plaintiffs' claims, as that is an impermissible inquiry into the merits of the case:

In this case, Appellant alleges that the common wrong giving rise to this litigation is that the Appellees engaged in an unfair and deceptive business practice of imposing the early termination fee.  Appellant further asserts a laundry list of common questions of law and fact that stem from this alleged common wrong.  There must be a determination on these common issues.  The mere fact that individual issues and defenses may be raised regarding the recovery of individual members cannot defeat class certification where there are common questions concerning the defendant's alleged wrongdoing which must be resolved for all class members.  Moreover, an attempt to raise defenses at this stage is an attempt to delve into the merits of the case. . . .

* * *

This court has further said that if a case involves preliminary issues common to all class members, predominance is satisfied even if the court must subsequently decertify a class due to individualized damages.  However, if the preliminary issues are sufficiently individualized, then predominance is not satisfied and class certification is improper.  Indeed, a case that presents numerous individual issues regarding the defendants' conduct, causation, injury and damages will best be resolved on a case-by-case basis.  Stated another way, predominance does not fail simply because there are individual issues that may arise; the central question to be resolved by the circuit court is whether there are overarching issues that can be addressed before resolving individual issues. . . .

* * *

Here, by focusing on the merits of the case, the court noted that it might be necessary to conduct thousand[s] of mini-trials that would overwhelm its docket and thus concluded that the superiority requirement was not satisfied.  However, as we have explained, the circuit court's reasoning was based on an impermissible evaluation of the merits of this case.  Accordingly, the circuit court abused its discretion in finding that the requirement of superiority could not be satisfied.

Id. (citations omitted).  Because the defense expert's testimony addressed issues of how to prove damages and the reasonableness of the liquidated damages as compared to actual damages, the Arkansas Supremes concluded that it was concerned with the underlying merits of the case and the trial court had abused its discretion in refusing to strike such testimony.

Of course, Rule 23 is a procedural device that is not intended to change the substantive elements of underlying claims or defenses viz a viz any individual class member.  See, e.g., Compaq Computer Corp. v. LaPray, 135 S.W.3d 657 (Tex. 2004).  By wholly ignoring how the defendant will prove its defenses with respect to each class member in a classwide trial, the Arkansas approach effectively alters substantive elements of the defenses -- which is not what the drafters of Rule 23 intended.  Thankfully, Arkansas remains an outlier jurisdiction, and the trend toward rigorous analysis of how the case will actually be tried -- both the causes of action and the defenses -- remains the norm in class action jurisprudence.

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Last November I posted about two decisions on motions to dismiss issued by Judge Otrie Smith in the MDL involving bisphenol-A ("BPA") in baby bottles, sippy cups and infant formula, which is pending in the Western District of Missouri.  Apparently the "Bottle Defendants" -- who had not received the benefit of federal preemption in Judge Smith's opinion -- moved to reconsider on the breach of warranty and unjust enrichment claims or, in the alternative, certify the issues for interlocutory appeal.  On Tuesday, the court issued an opinion denying the motion.

Growing up in my small Missouri town, I was always an optimist.  Indeed, I was an actual member of the Optimist Club, which began its weekly meetings at the incorrigibly optimistic hour of  6:30 a.m.  I'm prone to viewing the sippy cup as half full, rather than half empty. 

And so you would expect me to be encouraged by this little nugget in Judge Smith's order denying the defendants' motion.  The court acknowledged that its prior order might have been unclear in its discussion of unjust enrichment.  The court had never intended to suggest that all plaintiffs "automatically and necessarily have a valid claim for unjust enrichment."  Slip op. at 2.  Rather, unjust enrichment is an individual issue because of the differences in state laws and in the factual situations of the plaintiffs:

The Court's holding is, essentially, that its "benefit of the bargain" analysis did not affect the unjust enrichment claims because the "benefit of the bargain" does not play a role in the analysis -- at least, for some jurisdictions.  In contrast to the law of warranty (which is somewhat uniform because of the states' adoption of the Uniform Commercial Code), the law of unjust enrichment cannot be confidently described as uniform.  When this observation is coupled with the differing circumstances of each Plaintiff (and potential Plaintiff), the Court cannot conclude that no purchaser can assert a claim for unjust enrichment.  Ultimately, differences in individual circumstances and the content of state laws make it impossible for the Court to hold that all consumers either have or do not have a cause of action as a matter of law.

Id. at 3.

Thus, although the Bottle Defendants don't get a free ride to the Eighth Circuit just yet, Judge Smith has clearly given them a present, as there is no way he can certify an unjust enrichment class consistent with that opinion.

Hit my sippy cup again, bartender!

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That Fred Burnside gets TWO gold stars today!  First, he informed me that the Ninth Circuit refused to hear the appeal of the decision denying class certification in the Xbox litigation.  Now he shares with us a well-written opinion from the Washington Supreme Court holding that a trial court in wireless telephone litigation correctly refused to certify a nationwide class action.

The decision in Schnall v. AT&T Wireless Servs., Inc., No. 80572-5 (Wash. Jan. 21, 2010) (en banc) is particularly timely because its reasoning on the Washington Consumer Protection Act stands in stark contrast to the decision I highlighted on Tuesday, which had effectively read the causation requirement out of Florida's Deceptive and Unfair Trade Practices Act.  But I've gotten ahead of myself.

In Schnall, plaintiffs had brought a putative nationwide class action against AT&T Wireless, claiming that its collection of a "universal connectivity charge" violated the customers' contracts and violated Washington's Consumer Protection Act.  The trial court had refused to certify the class, but the intermediate appellate court had reversed, reasoning that the challenge to a standardized contract was capable of class adjudication.

The Washington Supreme Court reversed the class certification, making four important points.  First, the court held that the trial court had not abused its discretion in holding that the need to apply the law of 50 states made the putative nationwide class fail the predominance requirement.  The Washington Supremes observed that the trial court was correct in honoring the choice of law provision in the contracts, which required the application of the law of the place where the customer signed the contract.  Further, it cited at length the federal precedents recognizing that the need to apply the law of 50 states generally makes class certification untenable, because the variations in state laws may swamp common issues and defeat predominance.  Slip op. at 11.  For example, in the context of the Schnall complaint, the court observed that, for those states that recognize it, "[t]he availability of the voluntary payment doctrine alone could abrogate AT&T's liability for all customers who voluntarily paid the [fee] after receiving the informational flyer."  Id. at 12.

Second, the Washington Supremes noted in their analysis of the superiority factor that:

Washington has no interest in seeing contracts executed by AT&T representatives in other states with citizens of those states examined and adjudicated in Washington courts.  Certified as a nationwide class action, this case would present an unwarranted and unnecessary burden on the state judicial system, all at a large cost to taxpayers.  There is no sound reason in this case for this court to force Washington trial courts to entertain the contract claims of citizens from around the nation.  Their state courts are equally as prepared, if not better situated to apply the contract laws of their states.  The trial court did not abuse its discretion by denying nationwide certification of the plaintiffs' contract claims.

Id. at 15 (citation omitted).

Third, the Washington Supremes recognized that the state's Consumer Protection Act ("CPA") does not apply extraterritorially to provide a cause of action to nonresidents whose claims arose in other states.  Id. at 16.  This geographic restriction is inherent in the language of the statute, but as the court recognized, it also emanates from the CPA's "history as a tool used by the State attorney general to protect the citizens of Washington."  Id.  The AG, the court noted, has no power beyond the state's borders and is charged with protecting only Washington residents.  Thus, regardless of whether it is the official Attorney General or a "private attorney general" suing to enforce the statute, the jurisdictional limitation applies and a "private claimant cannot state a CPA claim by proving the defendant's practices affect the public interest or the citizens of another state."  Id. at 17 (emphasis in original).

Fourth -- and this is where the decision stands in stark contrast to the one I discussed on Tuesday -- the Washington Supremes reiterated that even for Washington plaintiffs, proof of causation is an essential element of a CPA claim.  Id. at 18.  Indeed, "proximate cause in a class action cannot be established by 'mere payment' of an allegedly injurious charge."  Id.  Rather, "in the context of private CPA actions where plaintiffs seek damages, more than a mere capacity to deceive must be shown to establish 'some causal link between defendant's unfair act and [consumer's] injury," and, "[i]n the context of private misrepresentation cases, a plaintiff can satisfy the 'but for' causation requirement by showing she relied on the misrepresentation."  Id. at 20 (citation omitted).  In the context of the Schnall case, that meant that where the plaintiff actually knew that the charge was being levied, the alleged "misrepresentation" had been eliminated as the "but for" cause of the injury.  Id. at 21.  Accordingly, even for Washington residents to whom the CPA applied, the issue of causation could be an individual issue that would defeat predominance.  But because the trial court had not analyzed that question sufficiently, the Washington Supremes remanded the case with instruction to consider the question in the context of a statewide class.

The court's conclusion forcefully shuts Washington's doors to putative nationwide class actions:

In sum, we agree with the trial court that this action should not be certified as a nationwide class action.  Washington need not apply its Consumer Protection Act, or its contract laws, to the citizens of other states in order to protect the interests of the citizens of Washington.  A nationwide class would be unmanageable and unduly burdensome on the trial court and the state judicial system and serve no real benefit to plaintiffs who are free to bring statewide class actions in their home states. 

Id. at 22.

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Loyal reader Fred Burnside just informed me that the Ninth Circuit has denied the plaintiffs' Rule 23(f) petition to appeal of the denial of class certification in In re Microsoft Xbox 360 Scratched Disk Litigation, No. C07-1121-JCC, Slip op. (W.D. Wash. Oct. 5, 2009).  Previously I had posted on the district court's decision, which refused to apply the law of the defendant's residence to a putative nationwide class and recognized that causation and damages require individualized proof where most class members have not experienced the alleged product malfunction.

Congratulations to Davis Wright Tremaine!

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The recent opinion in Fitzpatrick v. General Mills, 2010 WL 146846 (S.D. Fla. Jan. 11, 2010)highlights how important the reliance/causation requirement is in consumer fraud class action litigation.  The court in Fitzpatrick refused to certify a class for breach of express warranty because establishing that the challenged statements in yogurt advertising formed the "basis of the bargain" would require reliance, thus destroying predominance under Rule 23.  Nevertheless, because the court concluded that under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) no plaintiff was required to establish deception or causation specific to himself -- but instead could rely on a hypothetical reasonable everyman -- the court certified a class of Florida consumers.

Fitzpatrick was a challenge to General Mills's Yo-Plus yogurt, which contains probiotic bacterium, inulin (fiber), and vitamins A and D.  The defendant had marketed this probiotic yogurt as an "aid in promoting digestive health."  Plaintiff, who had been eating a competitor's probiotic yogurt, switched to Yo-Plus and, over a year, bought roughly 24 4-packs of Yo-Plus.  She claimed her digestive health was the same before, during, and after eating Yo-Plus, and thus claimed it provides no digestive benefits, its marketing is deceptive, and she is entitled to damages under the FDUTPA.

Despite the language of the FDUTPA and a number of decisions holding that an FDUTPA plaintiff must establish "causation" -- i.e., that the deceptive conduct was an actual cause of his damages -- the court concluded that plaintiff's class could be tried almost entirely on generic proof.  For example, the court reasoned that to establish deceptiveness a plaintiff need not point to any specific advertisement in which he heard an alleged misrepresentation; rather, he could "reach outside the circumstances of a single transaction to establish a 'practice' constituting a deceptive act."  Slip op. at n.5.  As the court put it, each plaintiff would need to prove that he was "exposed to" the "allegedly deceptive message that eating Yo-Plus promotes digestive health in ways that eating normal yogurt cannot," but in proving that the message is deceptive, he may introduce evidence about ads to which he was not personally exposed.  Slip. op. at 7.

As for "causation," the court relied on a Florida court of appeals decision to hold that "'[t]he question is not whether the plaintiff actually relied on the alleged deceptive trade practice, but whether the practice was likely to deceive a consumer acting reasonably in the same circumstances.'"  Slip op. at 7 (citation omitted). 

Untethering deception and causation from a particular plaintiff and pegging it instead to a hypothetical everyman will yield bizarre and unjustifiable results.  To begin with, under such a rule a class member who bought Yo-Plus for reasons other than digestive health would recover regardless of the fact that he was not deceived.  The same would be true for a doctor who actually read the studies General Mills relies upon, and bought Yo-Plus with full knowledge of the scientific literature. 

Moreover, should consumers who actually experienced digestive health benefits be allowed to recover damages under the FDUTPA?  The court says that the damages issue "centers on the scientifically complex question of whether Yo-Plus provides a digestive health benefit, and if General Mills had an adequate basis to disseminate that message to Florida consumers."   Slip op. at 16.  So apparently plaintiff's subjective claim that her digestive health was not benefited by Yo-Plus is defeated if the defendant is adjudicated to have had adequate scientific proof of such benefit generally.  And if the defendant is not determined to have had quite enough evidence, the court's clear implication is that consumers who nevertheless received digestive health benefits might have a damages claim.  That, of course, would be an absurd result.

Causation and injury are fundamental bedrocks of American jurisprudence.  Indeed, one cannot have standing to sue without them.  When courts read the causation and injury requirements out of causes of action and make the outcomes determined by hypothetical actors, they increase the risk that uninjured people will benefit unfairly from a lawsuit.  Where, as here, such rules are to be applied in a class action, that risk increases exponentially.  The causation and injury requirements of the FDUTPA -- read in plain English as the legislature wrote them -- require individualized determinations that should have precluded class certification.

Here, even the class definition, as amended by the court, requires a subjective individual determination that ought to have prevented class certification:  "all persons who purchased Yo-Plus in the State of Florida to obtain its claimed digestive health benefit."  That is not an objectively identifiable class -- it requires inquiry at the outset into why class members bought the product.  Who is bound by a judgment in that class?  And if the class loses, couldn't one simply argue in a future suit that she was not bound by the Fitzpatrick judgment because she had bought Yo-Plus for a different reason?

The court's decision in Fitzpatrick is subject to serious challenge on appeal.  But by contrasting the effect of a causation/reliance requirement by denying certification of the express warranty class, the opinion can serve as a useful teaching tool for why it is important not to read the basic causation and injury requirements out of state consumer protection statutes.

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Yesterday Merck won an important appeal in a California Vioxx class action in which plaintiffs had argued that the California Supreme Court's recent decision in In re Tobacco II Cases, 46 Cal. 4th 298 (2009) required the reversal of a trial court's refusal to certify a class action under California's Unfair Competition Law.  See In re Vioxx Class Cases, No. B216521 (Cal. App. -- 2d Dist. Dec. 15, 2009).  The Vioxx Class Cases decision is important because it recognizes that although Tobacco II imposed a new understanding of the UCL's standing requirement, it did not fundamentally alter the other elements of the statute, and a proposed class can still fail the class action prerequisites where the relief requested requires individualized determinations and where the named plaintiffs' claims are not typical of those of other class members.

Vioxx was a Non-Steroidal Anti-Inflammatory Drug ("NSAID") that was used to treat pain until it was removed from the market in 2004.  Unlike aspirin or naproxen, which are NSAIDs that can cause gastrointestinal complications, Vioxx was a "COX-2" inhibitor that was expressly designed to avoid the gastrointestinal effects inherent in NSAIDs like naproxen.  Vioxx was removed from the market after studies determined that it presented a risk of adverse cardiovascular effects.

Plaintiffs brought a statewide class action under the UCL, the False Advertising Act, the Consumer Legal Remedies Act, and common law unjust enrichment.  They sought classwide restitution of the difference in price between what they paid for Vioxx and what they would have paid for a safer, equally effective, pain reliever.  Their economist calculated that price differential to be $8.3 billion nationally, but did not break it down to what allegedly was owed to California purchasers.

Plaintiffs' theory of liability was simple:  Merck knew its drug presented cardiovascular risks, but concealed that fact and marketed Vioxx as safe to the public and to doctors.  Slip op. at 7.  As a result, they said, they were entitled to classwide restitution of the difference between the price of Vioxx and the price of generic naproxen.

Interestingly, in discovery, plaintiffs would not say that they would have taken naproxen instead of Vioxx.  Rather, they would only say that they would not have taken Vioxx if they had known the risks, and that the drug they would have used instead was irrelevant.  Slip op. at 6.

In the trial court, Merck had established that roughly 16,500 people in the US died from gastrointestinal bleeds -- the most common NSAID complication -- each year, and over 100,000 were hospitalized.  It presented medical testimony that for patients with a history of serious gastrointestinal problems who could not tolerate traditional NSAIDs, COX-2 inhibitors like Vioxx were the only appropriate option.  Further, it presented evidence from third party payors -- who were included in the class of purchasers, even though the named plaintiffs were all individuals -- establishing that some third party payors' Pharmaceutical and Therapeutics committees had studied the risks of Vioxx thoroughly and only approved the drug for use with patients who had a history of gastrointestinal disease and had first tried one or two traditional NSAIDs without success.  The third party payors' records also established that when Vioxx was removed from the market, most patients did not switch to generic NSAIDs like naproxen, but rather switched to another branded COX-2 inhibitor with a price comparable to Vioxx.

Merck also established in the trial court that doctors apply their clinical judgment to each patient's unique situation in choosing which pain medicine to prescribe, looking at eight different factors.  Merck also established that doctors rely on different sources of information, with some even rejecting out of hand research the company provides.

On appeal, plaintiffs challenged three conclusions of the trial court.  First, they challenged the trial court's conclusion that the individual plaintiffs' claims were not typical of the claims of third party payors.  Second, they said the trial court erred in concluding that individual issues of reliance barred a class action.  And third, they urged that their method of calculating damages was subject to common, class-wide proof, making classwide restitution appropriate.

Typicality and Third Party Payors

Plaintiffs argued that the individual plaintiffs could represent the interests of the third party payors -- like union health benefit plans -- because if an individual relied on Merck's alleged misrepresentations to buy Vioxx, then the third party payor who paid for most of that prescription should be entitled to recover, too.  The Court of Appeal held that the flaw in this analysis is that it treats the third party payor as a passive entity that pays without having any say in what is prescribed.  But the evidence showed that, at least for some large third party payors, their Pharmaceutical and Therapeutics committees conducted literature reviews and studies, and made their own decisions about what they were going to pay for.  As a result, evidence about what alleged misrepresentations the individuals received or relied upon could not apply to third party payors, and the court could not presume reliance across all third party payors based on any individual's reliance.  Slip op. at 21.  Indeed, for third party payors who only paid for Vioxx where there was a history of gastrointestinal problems and the patient could not tolerate other NSAIDs, every penny it paid for Vioxx was for a patient who benefited from the prescription.  Id. at 22.  Accordingly, the individuals' claims were not typical of the third party payors.

Individual Issues of Reliance Predominate the CLRA Claim

California's Consumer Legal Remedies Act requires some form of causation between the unlawful act and the consumer's damages:  it gives a cause of action to "[a]ny consumer who suffers any damage as a result of the use or employment" of an unlawful act.  Cal. Civ. Code sec. 1780(a) (emphasis added).  Some California cases have held that an "inference of reliance" may arise for the class where a material misrepresentation has been made to the whole class.  But "if the issue of materiality or reliance is a matter that would vary from consumer to consumer, the issue is not subject to common proof, and the action is not properly certified as a class action."  Slip op. at 16.

Plaintiffs suggested that hiding an increased risk of death from cardiovascular complications is about as material as a misrepresentation can get, and that reliance should be inferred to the whole class for purposes of the CLRA.  But the Court of Appeal rejected this notion for four reasons.

First, Vioxx did not present an increased risk of death for all patients, because there were patients with gastrointestinal problems who would have been more likely to die from complications with traditional NSAIDs like naproxen.  Second, the record evidence reflected that there were patients who would still take Vioxx if it were on the market today, and physicians who would still prescribe it.  Thus, for some subset of the class, the cardiovascular risks were not material to their decision whether to take the medicine.  Third, the differences in how doctors study and evaluate the risks of medicines prevented a classwide inference of materiality.  And fourth, the patient-specific factors that doctors evaluate in prescribing a pain medicine also made a presumption of materiality not viable.  For example, a doctor might downplay the clotting risk of Vioxx for a patient already receiving a blood thinner like Coumadin.  Slip op. at 24. 

Individual Issues Regarding Injury and Restitution Predominate the UCL and FAA Claims

The Court of Appeal noted that although the UCL liberalizes the standards for finding liability, it narrowly prescribes the remedies available under the statute:  injunctive relief and restitution.  There was no need for injunctive relief, since the product had been pulled from the market.  So the question was one of restitution.  Plaintiffs' economist proposed comparing the price of Vioxx with the price of generic naproxen, using the difference as the amount of restitution. 

But the Court of Appeal concluded that this approach could not be applied to the class as a whole, because there was substantial record evidence that after Vioxx was withdrawn from the market, most Vioxx patients switched to other similarly-priced brand-name COX-2 inhibitors, not generic naproxen.  Plaintiffs argued that adjudicating the validity of naproxen as a comparison improperly went to the merits of the action, but the Court of Appeal said no.  Rather, it went to whether a "measurable amount" of restitution could be proven on a classwide basis.  The court held that it could not, and that class members thus would have to individually establish the appropriate comparator medicine, and then whether he suffered an injury.  This was a patient-specific issue, the court held, "incorporating the patient's medical history, treatment needs, and drug interactions."

Dicta on the Class Definition

The Court of Appeal was highly critical of the plaintiffs' class definition, which included "all individuals or entities in California who . . . paid some or all of the purchase price for the prescription drug Vioxx."  Slip op. at 6-7.  Besides improperly lumping individuals and third party payors together, the Court of Appeal also was clearly troubled that there was no carve-out for people who suffered physical injuries (slip op. at 5-6, n.4), thereby presenting problems of claim-splitting.  The court said the class definition was overbroad, and that those with physical injuries "should not be bound in an action pursuing only economic damages for the price of Vioxx."  Slip op. at 20, n.16.  Moreover, the class definition also was overbroad because it included those with flat co-payment obligations who would have paid the same amount of co-payment regardless of what drug was applied; they would have suffered no injury, and thus should not be in the class.  Id. 

Moreover, given the fact that -- as the Court of Appeal noted -- many of the class members actually derived benefit from Vioxx's lack of gastrointestinal effects, I would argue that the class definition also should have been required to exclude those people from the class.

The decision in Vioxx Class Cases is an important reminder that the elements of the causes of action for UCL, CLRA, FAA and unjust enrichment claims in California provide important defenses to class certification.  Just because a UCL claim may survive a demurrer does not mean that it can be tried on a classwide basis.  Defendants would be wise to follow Merck's lead and develop strong factual bases for why classwide presumptions are not viable and individual proof of injury should be required.

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California state courts are reluctant to apply their Unfair Competition Law to a nationwide class.  Perhaps it's because they recognize that theirs is one of the most liberal (and standardless) consumer fraud statutes in the nation.  Whatever the cause, this reluctance made it all the more notable when Judge Christina A. Snyder held -- with little conflicts-of-law analysis whatsoever -- that the UCL could be applied to a nationwide class of advertisers suing Citysearch.  See Menagerie Productions v. Citysearch, 2009 WL 3770668 (C.D. Cal. Nov. 9, 2009).

Plaintiffs sought to represent a nationwide class of advertisers who had elected to have their advertising priced by the number of clicks on their ads.  CitySearch recognized that "spiders," "robots," and other tools often try to click on advertisers' ads, and these do not represent potential sales.  Thus, CitySearch represented that it employed "industry leading traffic quality systems . . . to detect unusual and fraudulent click behavior.  Attempts to artificially drive up an advertiser's clicks, whether manually or via robots or other deceptive tools, will be detected by our systems and automatically thrown out."

Plaintiffs claim CitySearch failed to identify fraudulent clicks, and that they paid too much for their advertising as a result.  They asserted breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the Unfair Competition Law.

The court found that the requirements of Rule 23(a) were met, ignoring the defendant's arguments that plaintiffs had not seen the alleged misrepresentations and that CitySearch had had individual dealings with complaining advertisers, which made the plaintiffs' claims atypical.

The court then analyzed whether the proposed class met the requirements of Rule 23(b)(3).  It held that the breach of contract count met the predominance requirement because the language of the contract -- which was the same for all class members -- was unambiguous, and it specified that California law would govern.  Even if the language were not unambiguous, the court reasoned, the extrinsic evidence that the court would rely upon would be representations on CitySearch's website that were uniform for all class members.  It similarly held that the breach of the covenant of good faith and fair dealing count also met the predominance requirement.

On the UCL claim, the court found that the predominance requirement was met for the "fraudulent" prong of the UCL because, it reasoned, there was no need to adjudicate individual circumstances; rather, applying In re Tobacco II, 46 Cal. 4th 298, 320 (2009), the court concluded that the case would be adjudicated under a "reasonable consumer standard" that focuses on whether members of the public were likely to be deceived."  Thus, there would be no individualized proof of deception, reliance, and injury caused thereby.

The court reached a different conclusion for the "unfairness" prong of the UCL.  There, the court held that the test for "unfairness" requires a balancing of effects and motives that make the plaintiffs' individual expectations relevant in determining the extent of the harm.  As such, the court concluded that the predominance requirement was not met for claims under the "unfairness" prong of the UCL.

Incredibly, the court's entire analysis of whether the UCL could be applied to a nationwide class based on the California residence of defendant CitySearch is contained in this sentence:

Furthermore, the Court agrees that California's UCL can be applied to the nationwide class, as CitySearch has not shown that any "differences between California law and the law of other jurisdictions are material," nor that "other states have an interest in applying their laws to this case."

2009 WL 3770668 at *15 (citation omitted).  To begin with, the burden on choice of law is the plaintiffs' as proponents of the class, not CitySearch's.  As yesterday's post showed, without an extensive choice of law analysis, plaintiffs cannot even begin to meet that burden.  But beyond that, come on:  there is no evidence of the differences between the California UCL and other states' UCLs being material?  Really?!!  How about the fact that every other state requires some sort of proof of actual deception that causes injury -- for each class member?  Or the fact that some states, like South Carolina, do not even allow class actions under their consumer fraud statutes?

The CitySearch opinion has a number of points that would appear to present appealable error, including the court's conclusions on superiority in which the proposed trial plan utterly ignores the defendants' individual defenses.  But this conclusion -- applying California's UCL to a nationwide class -- is the most wrong and least supported in the opinion, which should make it rife for an appeal to the Ninth Circuit.

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It's hardly news when another court refuses to certify a personal injury class action.  These days, it's almost a given that such litigation presents too many individual issues of fact to meet the predominance standard of Rule 23(b)(3).

But the recent decision from Judge Terrence Boyle in the Panacryl Sutures Multidistrict Litigation is notable for its considerable discussion of the choice of law problems presented by such claims.  See In re Panacryl Sutures Prods. Liab. Cases, No. 5:08-MD-1959-BO, Slip op. (E.D.N.C. Nov. 13, 2009).  In this case, plaintiffs alleged that they suffered personal injuries as a result of having been implanted with absorbable surgical sutures that were designed to remain in the body for 24-36 months after surgery to provide wound support.  The sutures had been the subject of a Class II recall by the defendant.  Plaintiffs alleged that they were prone to cause a high rate of infection, and that the defendant failed to warn of that fact.  Interestingly, the opinion never once quotes the proposed class definition, but we know that it was a putative nationwide class with representatives from North Carolina, Wisconsin, and Arkansas.

The court began its analysis with the choice of law issue, and it took the plaintiffs to task for not having provided a comprehensive survey of the substantive laws potentially applicable to all class members' claims, holding that they failed to carry their burden of proving that common questions of law predominate.  Slip op. at 4.

Nevertheless, the court completed the analysis, noting the differences in the substantive laws of the various states, and examining the factors identified in Section 6 of the Restatement (Second) of Conflict of Laws to determine what law governs in a tort action.  The court rejected the plaintiffs' suggestion that the law of the manufacturer's residence should govern, instead holding that the interests of the class members' home states in protecting their residents from in-state injuries caused by foreign companies outweighed New Jersey's interest in regulating domestic corporations.  Slip. op. at 6-7.  It noted that plaintiffs would not likely have imagined that their claims could be governed by foreign New Jersey law, and that the defendant had to expect to be subject to the laws of all jurisdictions in which it sold products.  The court also held that the plaintiffs' home states were where the injuries occurred, where the conduct causing the injury (sale and marketing) occurred, and where the relationship between the defendant and the plaintiffs was centered.  Id. at 9.

The court also cited a recent New Jersey Supreme Court decision -- Rowe v. Hoffman LaRoche, Inc., 917 A.2d 767 (N.J. 2007) -- in which the court held that applying New Jersey law to a Michigan plaintiff's claims merely because the drug was made in New Jersey "completely undercuts Michigan's interests, while overvaluing our true interest in this litigation."  Accordingly, the court held that the law of each class member's home jurisdiction would apply to his or her claims.

The court found that the numerosity and commonality requirements of Rule 23(a) were satisfied, but the conflict of laws problem required a finding that the typicality and adequacy of representation requirements of Rule 23(a) were not satisfied.  Slip op. at 12-14.

In analyzing the predominance requirement of Rule 23(b)(3), the court noted that "[c]ourts have generally found that common questions of fact do not predominate in medical products liability cases."  Id.  But beyond the individual fact issues trumping the predominance of any common issues, the conflict of law issues also required the same result.  Indeed, once again the court took plaintiffs to task for failing to provide an "'extensive analysis' of the laws of the interested jurisdictions showing that variations among the applicable state laws do not pose 'insuperable obstacles" to class certification."  Id. at 15.

Judge Boyle also rejected a proposed trial plan that would have used "issue classes" to decide common issues even though Rule 23(b)(3)'s requirements were not satisfied.  In the proposed trial plan, "Phase One" would have addressed "common issues of liability and general causation," and "Phase Two" would have consisted of "individual trials to determine specific causation and damages."  Id. at 18.  In rejecting the plan, the court stated:

But Rule 23(c)(4) may not be used to manufacture predominance for the purposes of Rule 23(b)(3).  Plaintiffs' trial plan does not eliminate the necessity of applying the laws of several jurisdictions or the individualized inquiry into whether Panacryl Sutures caused each plaintiff's injuries.  And even under Plaintiffs' proposed trial plan, the difficulty of applying the laws of several states to issues of liability and general causation would remain.

Id. at 19.

Judge Boyle's opinion is an excellent recent example of a trial court confronting head-on the proof problems presented by a personal injury class action and refusing to vary the substantive law (including the elements of causes of action, as well as individual defenses) just to achieve the so-called "procedural efficiency" of a classwide trial.

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My partners John Beisner and Jessica MIller will be presenting on a panel at this year's ABA National Class Action Institute.  The panel is entitled, "Hydrogen Peroxide Will Clear It up Right Away:  Developments in the Law of Class Certification."

This year the ABA is hosting the panel on both the East and the West Coasts.  You can attend in San Francisco on October 30, or in Washington, DC on November 20.  (John and Jessica will be at both programs.)

The faculty is an excellent mix of jurists, defense counsel and plaintiffs' counsel, and the one-day program is very comprehensive, including topics such as class action arbitration and developments in class action settlement law.

Check out the brochure and consider attending.

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How many litigators -- after having served that killer set of interrogatories, cross-examined that prevaricating expert, or filed that surgical strike of a dispositive motion -- have returned home to secretly slay the "evildoers" (as #43 used to call them) in a game of Halo 3?  Apparently one too many.  Since 2005, Microsoft has been defending cases alleging a defect in its Xbox 360 video gaming system.  The central allegation is that the Xbox loading tray allows the video game disc to load in such a way that it can be thrown or "chucked" from its spindle, and that the disc is then moving at such force that deep groves are gouged into the disc as it rattles around the inside of the machine, making the disc inoperable.

Loyal reader Fred Burnside of Davis Wright Tremaine LLP forwarded for our benefit yesterday's decision from Judge John C. Coughenour denying certification of a nationwide class in the litigation.  See In re Microsoft Xbox 360 Scratched Disc Litigation, No. C07-1121-JCC, Slip op. (W.D. Wash. Oct. 5, 2009).  The decision is important because it rejects the notion of applying the law of the defendants' residence to all members of the class, and because it recognizes that in a case where most class members have not experienced the problem, causation and damages are issues that require individualized proof.

Shortly before the release of the product, Microsoft had observed the issue of scratched discs.  Because its engineers determined that the problem occurred only if the machine was moved during game play (as the disc was spinning), the company put a warning sticker over the disc tray mechanism that read "Do not move console with disc in tray" and included an instruction in the user manual.  Microsoft had received roughly 55,000 complaints about scratched game disks, but this represented less than 1% of product owners.

Plaintiffs were residents of Pennsylvania, Washington, and California.  They sought certification of a class applying the law of Washington, Microsoft's residence.  The court analyzed choice of law first.

Microsoft had an interesting choice of law clause in its Xbox 360 warranty:

If you acquired the Xbox Product in the United States, the laws of the State of Washington, U.S.A., will apply to this Limited Warranty.  The laws of your state of residence will apply to any tort claims and/or any claims under any consumer protection statutes.

Slip op. at 5 (emphasis in original).

The court determined that the forum, Washington, would apply a contractual choice of law clause unless:  (1) without the provision, Washington law would apply; (2) the chosen state's law violates a fundamental public policy of Washington; and (3) Washington's interests in the outcome outweighs the chosen state's interests.  Id. (citation omitted).

The court proceeded to analyze two Washington Supreme Court decisions in which the court refused to apply forum selection clauses because they were violative of Washington's public policy:  Dix v. ICT Group, 161 P.3d 1016 (Wash. 2007), and McKee v. AT&T Corp., 191 P.3d 845 (Wash. 2008).  Although the court conceded that, at first glance, the cases seemed to support plaintiffs' position, it reasoned that, on closer scrutiny, they did not:

In Dix, AOL's provision would have required Washington residents to litigate in courtrooms on the other side of the country.  Microsoft's provision requires no such thing, and in fact subjects Microsoft to liability in the plaintiff's most convenient forum, his or her home state.  In McKee, AT&T's choice-of-law provision would have required that Washington residents hire an attorney familiar with New York law.  Microsoft's provision imposes no such burden, and in fact obligates Microsoft to familiarize itself with the consumer-protection laws of fifty different states. . . .  Microsoft's choice-of-forum provision . . . is enforceable, because it leaves open a "feasible alternative for seeking relief."  See McKee, 191 P.3d at 852.  Aggrieved Xbox customers have the option of filing statewide class-action suits in their home states.  Plaintiffs fail to point to a Washington case holding that the State's public policy is to guarantee nationwide class-action resolution of small claims, and this court does not read Dix and McKee as stating that much.

Slip op. at 7-8.

The court held that Washington law did not apply to the claims of all class members, but rather the consumer protection laws of each plaintiff's home state should be applied.  The court held that this alone would defeat predominance because "[s]tate consumer protection law varies considerably across the fifty states" and applying fifty states' consumer protection laws would "create innumerable difficulties."  Id. at 9.

But the court also held that individual issues of fact predominate over the common issues.  The court observed that fewer than one percent of Xbox owners had experienced the alleged defect, and recognized that most owners would use the consoles throughout their useful life without experiencing the problem.  Such class members, the court held, would have suffered no damages, and thus determining the issue of damages required an individualized injury.  Id. at 10-11.  Moreover, because the scratched discs may arise from what Microsoft characterized as product misuse, the cause of any damages also was an individualized fact issue that precluded class certification.  Id. at 11.

The decision in the Xbox Scratched Disc Litigation is an important reminder that even where a considerable number of people may have experienced a problem with a product, individual issues of fact and law may still make a class resolution of their claims unmanageable.

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Too often courts and litigants spout the canard that damages issues do not preclude class certification.  But where damages cannot be calculated by the easy application of a standardized formula, and instead involve a complicated, multi-faceted individualized inquiry, the unmanageability of damages issues can defeat class certification.  A recent decision from the Alabama Supremes highlights this point.

In Eufaula Hospital Corp. v. Lawrence, 2009 WL 2903459 (Ala. Sept. 11, 2009), the trial court had certified a class action of people who had visited the defendant's emergency room and were categorized as "self pay" patients.  These patients, who were uninsured and not covered by governmental programs like Medicare or Medicaid, had signed an admission contract providing that they obligated themselves "to pay the account of the Facility in accordance with the regular rates and terms of the Facility."  Plaintiffs alleged that this was a contract with an undefined price term, and that Alabama law required that the price implied by law must reflect the "reasonable value" of the services.  Plaintiffs argued that they were overcharged because the defendant charged them the rack rate (or "chargemaster rate") for services rendered, which was more than the hospital's cost and more than the hospital received for the same procedures performed on patients who were insured or covered by government programs.  Plaintiffs sued for breach of contract, unjust enrichment, and injunctive relief.  The trial court had certified the class under Rule 23(b)(2) and (b)(3).

The Alabama Supreme Court reiterated that trial courts faced with class certification decisions must engage in a rigorous analysis of whether the elements of Rule 23 are met.  The defendant had challenged the trial court's conclusion that the "reasonable charge" could be calculated on a classwide basis.  Plaintiffs' expert had looked at the compensation formulas employed by the three largest third-party payors:  Medicare, Medicaid, and Blue Cross.  Using those amounts, the expert concluded that a reasonable charge would be 115% of the hospital's actual cost for the procedure.

The Alabama Supreme Court observed that the class members themselves were not treated uniformly by the defendant:

[M]any self-pay or uninsured patients are offered discounts on their bills, including prompt-pay discounts and charity discounts, or the debts are settled for a lesser amount.  Also, many patients never pay their bills, and some debts are turned over to collection agencies.

Id. at *9.

Moreover, after analyzing a series of decisions from other states, the court recognized that ascertaining the "reasonable charge" for services would require an individualized inquiry and cannot be addressed by the plaintiffs' proposed one-size-fits-all formula:

Under Alabama law, a determination of a reasonable charge for medical services in this case will require an examination of the circumstances of the charges for the services, the customs in the medical-service community, the price a willing provider would take for its services, and the price a recipient of those services would pay.  The testimony by the defendants as to the normal rates charged by them will be relevant, as well as testimony concerning "the [defendants'] internal factors [and] the similar charges of other hospitals in the community."  We agree that such determinations are "necessarily an individual inquiry that will depend on the specific circumstances of each class member, the time frame in which care was provided, and both [the defendant's] and other hospitals' costs at that time."  Finally, the defendants' acceptance of lower payments from Blue Cross, Medicare, and Medicaid stem "from legal and contractual requirements that applied solely to those classes of patients," and is not necessarily based on market factors or, as both [plaintiffs' and defendants' experts] acknowledged, on the actual costs of the services provided.  Thus, reliance on the rates paid by those entities may not be the baseline on which to calculate a reasonable charge for the medical services rendered.

Id. at *14 (citations omitted).

The court thus concluded that the individualized issues inherent in calculating a reasonable charge overwhelmed class cohesiveness and rendered certification under Rule 23(b)(2) and (b)(3) inappropriate.

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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.

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Conventional wisdom says that the need for individual proof of damages does not preclude class certification.  But as Judge Dennis Cavanaugh recently recognized in Kings Choice Neckwear v. FedEx Corp., 2009 WL 689718 (D.N.J. Mar. 11, 2009), the need for individual proof of damages can destroy the predominance that makes the class manageable.

In Kings Choice, plaintiff was a frequent customer of FedEx who used a standard shipping agreement that allowed FedEx to recover "all reasonable costs incurred by FedEx" in collecting payment.  Plaintiff received a letter from FedEx's collection agency demanding payment of outstanding fees plus a 25% collection fee.  Plaintiff paid the collection fee under protest, and then brought a class action for breach of contract, violation of the New Jersey Consumer Fraud Act, and unjust enrichment, claiming that the 25% collection fee did not represent the "reasonable costs" allowed by the shipping agreement.

The court held that the requirements of Rule 23(a) were met, but that the proposed class failed the predominance and superiority requirements of Rule 23(b)(3).  As the court explained:

By its very nature, determining the reasonableness of the 25% collection fee is a highly fact-specific inquiry that depends upon a series of individualized variables within the collection process, including, inter alia, the frequency and manner of attempted contacts with the debtor, the necessity of retaining a collection agency or outside attorneys, and the extent to which legal remedies were pursued.  While Plaintiff suggests that a cost-averaging approach is appropriate because collection efforts are mostly uniform with only a negligible difference in cost, the Court finds differently and holds that determining "reasonableness" would require an untenable inquiry into the facts of each specific case.  Furthermore, assuming, arguendo, that liability could be established on an aggregate basis, it nonetheless appears that the Court would be required to conduct a series of "mini-trials" to determine damages.  The amount of damages owed to each individual class member will differ depending upon a series of individualized factors, including, inter alia, the cost of collection, whether payment was actually made, whether a reduced payment was negotiated, and whether any interest is owed.  Because it appears that FedEx sometimes waives collection fees and at other times negotiates reduced fees, the Court would be forced to inquire as to each individual class member to determine the amount paid, and, if reduced, whether the amount constituted a "reasonable" approximation of the collection costs. . . . [T]he Court finds that determining damages in this case on a class-wide basis would require significant individualized inquiry and would present manageability problems.

Id. at *4. 

In concluding that the class device was not superior to other methods of adjudication, the court also noted that the laws of 51 jurisdictions likely would have to be applied, further compounding the disparities among class members and presenting the court with insuperable obstacles.  Id. at *5.

Kings Choice is a good reminder to not let an old canard about damages keep you from making a compelling argument that the individualized inquiry required to determine damages can present such manageability problems that a class should not be certified.

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In January I reported on a decision in which the Sixth Circuit Court of Appeals affirmed the denial of class certification in a case involving a train derailment which resulted in the release of sulfuric acid in a small community.  Recently a federal district court reached a similar result in a case involving the post-Christmas 2004 release of anhydrous ammonia from a railroad tank car in Lake Charles, Louisiana.  See Williams. v Union Pac. R.R. Co., 2009 WL 612339 (W.D. La. Jan. 19, 2009) (Rept. & Recc.), aff'd in part, rev'd in part, 2009 WL 604126 (W.D. La. Mar. 9, 2009).

In Williams, plaintiff sought to recover on behalf of a class of some 3,500 people exposed to the ammonia as property owners, residents, or holiday guests for personal injury, mental distress, property damage, and business interruption. 

The Magistrate Judge held a class certification hearing and issued a report and recommendation.  Plaintiff had submitted 14 affidavits from individuals claiming ammonia exposure, meteorological data establishing plumes, the names of 937 people alleging exposure, and census data suggesting there were 965 households within a one-mile radius of the exposure site.  The defendants challenged numerosity, typicality, commonality and adequacy.  In particular, they faulted the named plaintiff's ability as a 73-year-old retiree who had not worked since 1955 to represent the class and establish economic damages.  According to the Magistrate Judge, the prerequisites of Rule 23(a) all were met. 

The District Court, however, disagreed, examining the issues de novo.  It held that "there was a lack of appropriate definitive evidence in the record to support" the elements of numerosity and adequacy of representation.  2009 WL 604126 at *2.

The Magistrate Judge also had concluded that the case did not meet the predominance requirement of Rule 23(b)(3) for a number of reasons.  First, the damages calculation was not formulaic, but instead would require individual determinations, and "'where individual damages cannot be determined by reference to a mathematical or formulaic calculation, the damages issue may predominate over any common issues shared by the class.'"  2009 WL 612339 at *7 (citations omitted).

Plaintiff proposed, as an alternative, a phased trial plan, with a class trial to establish liability and a separate trial to determine individual causation and damages.  The Magistrate Judge rejected this approach because it would degenerate into a series of individual trials:

"Rarely, however, will a mass trial lead to the prompt entry of judgment in favor of a large group of plaintiffs against one or more defendants because even if the first jury finds, for example, that the defendant's product could have caused the plaintiff's injury, individual trials will still be necessary to determine specific causation, whether any affirmative defenses are available to the defendant, and the extent of the plaintiff's damages."

Id. at 9 (citation omitted).

The Magistrate Judge held that individual issues predominated, and that the predominance of individual issues detracted from the superiority of the class action device as a means of resolving the claims before it.  The District Court agreed, holding that the "diversity in the types and degrees of damages allegedly suffered by the prospective plaintiffs . . . is both evident and sufficient to deny certification."  2009 WL 604126 at *2.

Notably, in between the class certification hearing and the District Court's decision, a minor defendant -- the Calcasieu Parish Polce Jury -- had reached a settlement with the named plaintiff in which neither she nor any class member would receive a dime of compensation.  Instead, the police jury would pay money that would be applied solely to the costs of the litigation.

The District Court refused to approve the settlement, noting that under AmChem Prods., Inc. v. Windsor, 521 U.S. 591 (1997), a settlement class must at the very least meet the elements of Rule 23(a).  Because the Court concluded that plaintiff had not satisfied the numerosity and adequacy standards, it refused to engage in a fairness hearing for the settlement.  2009 WL 604126 at *1-*2.

Williams is yet another instructive opinion that reminds us that just because damages may flow from the same incident, the class action tool may not be the superior way to adjudicate those damages where they are not subject to a simple mathematical formula.

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Sometimes it takes until the eve of trial for a judge to really get it.  There, with sleeves rolled up and mired in the exhibit lists, motions in limine, draft jury instructions, summary judgment motions and the like, epiphany can strike:  "Gee, the nitty-gritty of these cases really is about individual issues, and even the few named plaintiffs whose claims are being tried here really are different.  How can a verdict as to one of them bind absent class members consistent with due process?"

I'm not saying that's what happened in the Neurontin off-label-use class action down in Philadelphia this week.  I'm not involved in the case and have no reason to know.  But it's certainly one explanation for the order I'm reading.  Gregory Clark and Linda Meashey v. Pfizer Inc. and Warner-Lambert Co., LLC, No. 1819, Control Nos. 061293/061291, Slip op. (Pa. Ct. Com. Pleas -- Philadelphia County  Feb. 9, 2009).  [If you'd like a copy, e-mail me and I'll shoot you a pdf.]

The Clark case was scheduled to go to trial on March 9 as a class action.  But yesterday, the court granted summary judgment on the express warranty claim and decertified the class.  It did, however, deny summary judgment on the individual claims for misrepresentation, negligence, and negligence per se, and kept the March 9 trial date for the two plaintiffs' individual claims.

The court's reason for granting summary judgment on the express warranty claim was simple:  "Here, there is no evidence that plaintiffs saw, heard or in any way received any warranties that Neurontin could be used in circumstances not approved by the FDA.  The alleged fraud on the medical profession which is the essence of plaintiffs' claims does not create any warranty."  Slip op. at 4.

Importantly, the plaintiffs' individual proofs demonstrated that some class members actually received benefits from their off-label use of Neurontin.  Indeed, Plaintiff Meashey's prescribing physician testified that, in his clinical judgment, Neurontin had been effective for five patients whom he had taken off of the medicine after a Dateline feature, but subsequently re-prescribed the medicine when they experienced worsening anxiety.  Indeed, he even testified that Plaintiff Meashey herself "had gotten help with anxiety while on Neurontin."  Slip op. at 3.  Moreover, Plaintiff Clark's treating physician testified that he "continues to prescribe Neurontin for [certain off-label] conditions because in his clinical judgment it is effective" (slip op. at 3).

Faced with evidence that at least some class members benefited from the very use of the medicine that plaintiffs claimed was unlawful, the court granted summary judgment for defendants "as to those class members who benefited from prescribed off-label uses of Neurontin."  Slip op. at 4.

Even more important, the court concluded that, for this reason, the class should be decertified: 

Individual questions of fact exist as to each class member to determine whether their off-label prescription of Neurontin was beneficial.  Whether an individual class member suffered a compensable loss is an inherently individualized question which predominates, making class resolution impracticable and possibly impossible.

Slip op. at 5.

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Today Mark Herrmann and Jim Beck have an excellent post replete with lots of good citations on why no-injury classes present insuperable class certification obstacles.  Check it out.

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One of my all-time favorite bartenders, Howie, just can't believe what I do for a living.  "You mean you defend cases brought by a bunch of people who weren't hurt and didn't have their product break on them," he asks incredulously.

"For a lot of my cases, that's pretty much it."  I respond.

"So what kindof money do they think they're going to get outta these class actions?"

"Well, Howie, sometimes they want everybody who bought the product to get all of their money back.  And sometimes they just want the difference between the value of what they thought they were buying and the so-called "diminished value" of what they actually bought.  And again, they want this for everybody who bought the product, which can be a lot of money."

"Aww, that's ridiculous," Howie says.  Shaking his head and pouring another round, he consoles me:  "Well, Cuz, with cases like that out there for you to defend, at least you ought to win a lot!"

I'll enjoy telling Howie this weekend about Williams v. Nidek Co., Ltd., 2009 WL 226024 (Cal. App. -- 4th Dist. Feb. 2, 2009).  Fortunately, the court in Williams got it right, affirming the denial of class certification.  But the claims in Williams go a long way toward demonstrating everything that is wrong with consumer class action practice today. 

The plaintiffs in Williams had undergone Lasik surgery on their eyes to achieve hyperopic corrections (i.e., corrections for far-sightedness).  The Nidek laser that had been used during their surgeries had not yet been approved by the FDA for hyperopic correction.  (It subsequently was in 2006.)  Plaintiffs claimed that Nidek and plaintiff's doctors violated a host of statutes by "concealing" from plaintiffs that the Nidek laser was not approved by the FDA for this particular kind of Lasik surgery.  But plaintiffs admitted that they had not relied on any representations from the doctors about FDA approval, and they conceded that they "do not contend they were disappointed in the results of the surgery."  Id. at *6.  Indeed, plaintiffs defined a California residents class and a nationwide class, both consisting of people who had had the surgery, but who had not suffered personal injuries.  Id. at n.8. 

Yes, you read that right:  the putative class members were perfectly satisfied with the results of their surgeries and had not been physically injured.  Still, they wanted money back:  either "the entire cost of the surgery (because they did not receive what they had been promised) or, alternatively, the difference between the value of what they had been promised (surgery on an approved Laser) and what they received (surgery on a nonapproved Laser)."  Id. at n.14.

Of course the reason consumer class actions like Williams are pled to exclude the very people, if any, who may have been injured is that including them in the class would present too many individual issues, making class certification inappropriate.  So instead, plaintiffs plead it as a straightforward fraudulent concealment claim for economic harm, thinking that doing so will make it seem like there are fewer individual issues that would predominate a trial of the action.

California's class action rule doesn't mirror the federal Rule 23 exactly, but as it has been interpreted by California's courts, its elements are similar.  In particular, the common issues to be tried on a classwide basis need to predominate over the issues that require individual determination for each class member.  The trial court in Williams concluded that they did not, and the Court of Appeal affirmed.

As the court observed, the bulk of plaintiffs' claims were misrepresentation claims; they "turned on the assertion that the physicians misrepresented the Lasers as appropriate or approved for hyperopic procedures, or intentionally concealed (or negligently failed to disclose) that the Lasers were not approved for such treatments, and/or conspired to engage in such conduct."  Id. at *9.

But as the Court of Appeal recognized, "plaintiffs' misrepresentation/concealment/nondisclosure claims would have required a mini-trial to assess each permutation of the representations made to each class member by 60 to 70 doctors or their staff . . . and required an examination of the informed consent forms signed by the patient, and/or each patient's discussion with his or her doctor or staff, and whether [Nidek's Patient Information Booklet] had been given to some patients by some physicians."  Id. (emphasis in original).  Nidek had distributed, as required by the FDA, a booklet explicitly advising patients that the Laser was not approved for hyperopia.  Id. at n.13.  Moreover, even the named plaintiff's doctor had a patient's informed consent form disclosing that the FDA had not yet approved the Laser for hyperopia.

As the Court of Appeal recognized, these patient-specific mini-trials "would be further complicated by the fact that the physicians making (and the patients receiving) the representations spanned an approximately seven-year period," making "mini-mini-trials" on statute of limitations and tolling issues necessary for each class member.  Id. at *10.  Also, issues inherent to the 60-70 doctors potentially would be added to the mix.

Moreover, by adding the distributor, Nidek -- which had had interactions with many of the doctors, informed them that the hyperopic use was unapproved, and asked them to install software that would prevent use of the Laser to treat hyperopic conditions -- mini-trials also would be necessary addressing Nidek's dealings with each physician.

Even the damages inquiry would require individual mini-trials because the measure of damages required comparing the amounts paid and the value actually received by each patient.  Id. at *11.

The Court of Appeal in Williams clearly reached the right result by affirming the denial of class certification.  And yet it's disappointing that such a frivolous lawsuit had to go even that far:  through costly discovery, dispositive motion practice, and ultimately a class certification hearing. 

Just try explaining to Howie why this suit wasn't easily dismissed at the outset.  If you can do that, the next one's on me.

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