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

Sometimes it makes financial sense to settle meritless class actions, even when you know you could win if you pressed on through discovery, trial and appeal.  But how you do so -- and precisely what peace you are buying -- often can be tricky subjects.  Procter & Gamble recently proposed an interesting settlement of a BS class action in In re Dry Max Pampers Litig., Case No. 1:10-cv-00301 TSB (S.D. Ohio).

In the Spring of 2010, a number of class actions and individual actions were filed by parents who used Pampers' "Dry Max" diapers on their infants.  These diapers had a super-absorbent gel core.  The parents claimed that the gel caused severe diaper rash and burns on their infants.  Bloggers, Facebook pages, and other social media whipped parents into a frenzy.  The CPSC and Health Canada started an investigation.  A multi-district litigation was formed in the Southern District of Ohio before Judge Timothy Black, a recent Obama appointee.  A public relations storm ensued.

But in September, both the CPSC and Health Canada announced that they could find no connection between Dry Max diapers and infants' development of diaper rash, giving Pampers a clean bill of health.

But what to do with the lawsuits?  P&G moved to dismiss and, at the same time, moved to strike the class allegations.  Diaper rash, of course, is a common malady with many known causes, and the facts surrounding individual infants' diaper rash will differ substantially.

Plaintiffs' counsel waived the white flag.  They clearly had no case -- and no class action -- but presumably wanted to preserve their ability to obtain some sort of fee.  The court stayed the calendar so the parties could mediate with former federal judge Layn Phillips.  And a unique settlement was born.

To begin with, the proposed settlement is a 23(b)(2) settlement with no opt out rights.  All people who used Dry Max diapers on their children will be bound by the settlement.

What would they get?

1.  For 2 years, P&G will put on its Pampers labels a sentence referring customers to its website or an 800 number for information on "choosing the right Pampers product for your baby, preventing diaper leaks, diaper rash, and potty training."  Settlement Agreement at 18.

2.  For 2 years, P&G will include on its website two paragraphs of instructions to see a doctor if diaper rash persists or is accompanied by fever, pus, or boils, along with a link to the Mayo Clinic's website and the American Academy of Pediatrics' website.  Id. at 19.

3.  Cy pres relief -- P&G will spend a total of $300,000 over two years funding programs for medical schools related to infant skin health, and will spend a total of $100,000 over two years on an infant skin health program with the American Academy of Pediatrics.

4.  Money-back guarantee -- P&G will reinstate its money-back guarantee program for one year.  The program can have the same proof of purchase requirements that it had prior to its discontinuance.

And what would they give up?

1.  All equitable claims -- Class members release all equitable claims, known or unknown, including "all equitable claims for any damages or injuries."  They are barred from using a class action device in asserting any claim for relief that could have been brought in the lawsuits prior to settlement.  (Given that the lawsuits broadly alleged claims for personal injury, consumer fraud, violation of consumer protection statutes, etc., absent class members effectively are barred from using a class action device on any claim.)  Class members would preserve the right to file individual lawsuits for personal injury or actual damages caused by Dry Max diapers, however.

In sum, for releasing equitable claims and giving up the right to a class action, class members would receive the right to make unlimited claims against a money-back guarantee during one year and obtain information on diaper rash.

In this respect, the settlement is an ingenious post-transaction way to prevent class actions without the use of a pre-transaction arbitration agreement such as the one used in AT&T Mobility v. Concepcion.  It remains to be seen whether the Supreme Court's anticipated decision in Smith v. Bayer Corp. will impose constitutional limits on barring absent class members from filing other class actions in a way that might impact this Pampers settlement.

Interestingly, P&G's participation in the settlement appears to be based on an issue that may (or may not) be decided by the Supreme Court in Wal-Mart v. Dukes:  when damages are incidental to monetary relief in a Rule 23(b)(2) class action.  The settlement agreement states:

Procter & Gamble's agreement to seek a Settlement Class under Federal Rule of Civil Procedure 23(b)(2) is based on the belief that any monetary damages sought by Plaintiffs (other than individual claims as a result of personal injury or actual damage), which are not released claims pursuant to Section VIII(D), are properly viewed as merely incidental to the Injunctive Relief.

Settlement Agreement at 12.  It remains to be seen whether the opinion in Dukes may alter that fundamental assumption.

Four other aspects of this proposed settlement bear noting.  First, this is an all-Internet notice plan.  The parties correctly note that, because this is an injunctive relief class, individual notice is not constitutionally required.  So they have proposed a notice plan that relies on a press release, hyperlinks on the parties' websites, and a settlement website that would carry the long- and short-form notices.  See Settlement Agreement at 13-14.

Second, P&G agrees to pay up to $2.73 million in attorneys' fees, costs, and expenses, to be divvied up among the plaintiffs' firms by Lead Class Counsel.

Third, the representative plaintiffs would receive $1,000 "per affected child for each Plaintiff."  (It eludes me how this is compensation for time and effort spent as litigants, rather than a per-child compensation.)

Fourth, rather than having the court retain jurisdiction to enforce the agreement, the Settlement Agreement provides that all disputes are to be handled by mediation and, if that doesn't work, by final, binding, non-appealable arbitration.  Settlement Agreement at 28.  The parties' independent mediator, Layn Phillips, is selected as their first choice.  The backup approach is to agree on another neutral or, if the parties cannot agree, they will approach Layn Phillips or the court and ask for the appointment of one.

The proposed Dry Max Diaper Settlement is a creative approach to the age-old problem of how to settle meritless class actions.  Stay tuned for developments in the preliminary approval and fairness hearing processes regarding this settlement.

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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.

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Today's post is about dogs and drugs.  Mr. Ted E. Bear was kind enough to illustrate by channeling his inner "fat Elvis," complete with bejewelled white jumpsuit, prescription medicines, and alcohol.

Regular readers of this blog know that, over time, we have discussed many cases holding that if a plaintiff has not experienced a product malfunction, he has no injury and cannot assert a claim for breach of warranty or consumer fraud.  Last Wednesday the First Circuit Court of Appeals issued a decision that strongly reaffirms these principles and challenges the underpinnings of so-called "diminished value" class actions. 

In Rule v. Fort Dodge Animal Health, Inc., No. 09-1364, Slip op. (1st Cir. June 2, 2010), plaintiff had twice bought ProHeart 6 and had it administered to her dog, Luke, to protect him from heartworm.  Fortunately, it worked.  Luke never developed heartworm, and he never developed any adverse reactions to the medicine.

But the manufacturer ultimately issued a recall on ProHeart 6 because there had been incidents in testing and actual use of dogs developing adverse reactions.  Some even died.

Plaintiff brought a putative nationwide class action against the defendants, alleging a number of causes of action.  She claimed that if she had known the truth about the adverse reactions at the time she bought the medicine, the medicine would have been worth less than what she actually paid for it, and thus she (and the class) should recover the diminished value of the medicine.  The trial court dismissed her claims for lack of standing.  She appealed the dismissal of only 2 counts:  breach of the implied warranty of merchantability and consumer fraud under Massachusetts' statute, Chapter 93A of the Massachusetts General Laws.

The First Circuit said that the implied warranty claim was easily disposed of:

But the unfitness of ProHeart 6 lay in its potential for causing harm to the dog.  [Plaintiff] concedes that neither of the two doses injured Luke.  So, while the sale to [plaintiff] may have been of an unfit drug, its unfitness did not give rise to any injury to [plaintiff] against which the warranty was designed to guard.  Nor does she suggest that Luke is now more susceptible to injury, as might be the case where one bought and installed a defective tire that has not run its life or smoked cigarettes whose potential for harm lasts into the future.

Recovery generally is not available under the warranty of merchantability where the defect that made the product unfit caused no injury to the claimant, the threat is now gone, and nothing now possessed by the claimant has been lessened in value. . . .  True, purchasers whose dogs were injured might have such claims; but one who has no claim is not normally a suitable plaintiff to represent a class of those who do.

Slip op. at 5-6  (citations omitted).

In analyzing the consumer fraud claim under Chapter 97A, the First Circuit recognized that it was a closer call.  Some earlier opinions of the Massachusetts Supreme Judicial Court had suggested that a claim for deception might lie even where it did not result in a direct economic loss.  But the statute itself requires injury "caused by" the deceptive acts, and the later opinions interpreting the statute seem to clearly require injury suffered as a result of the alleged deceptive conduct.  The First Circuit ultimately held that "the notion of injury under Chapter 93A means economic injury in the traditional sense," and if Massachusetts wants to identify exceptions to that rule, it remains free to do so.  Slip op. at 12.

The court continued:

Conduct like that attributed to [the defendant] needs to be deterred, but not necessarily by those who bought the drug but were not injured.  The state has authority to seek heavy sanctions on those who engage in deceptive advertising even without injury, Mass. Gen. Laws Ch. 93, Sec. 4; and anyone whose dog was injured, or a class of those persons, may (assuming [plaintiff's] allegations are correct) likely sue and collect damages.  [Plaintiff], having suffered no economic injury, may not.

Id.

The First Circuit's opinion raises the important question of who should vindicate society's interest in deterring alleged deceptive conduct.  Seldom, if ever, should it be individuals who are uninjured by the conduct, as they lack the appropriate incentives.  Warranty law -- and the consumer fraud statutes of most states -- require that a plaintiff have actually suffered an injury caused by the alleged misconduct in order to maintain a claim.  Efforts to water down the standing requirements for individual plaintiffs must be resisted. 

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Judge Garrett E. Brown, Jr. recently issued an opinion in a consumer product class action that illustrates the typical problems with the types of claims that are presently brought as consumer class actions.  In Payne v. Fujifilm U.S.A., Inc., Civ. A. No. 07-385 (GEB), Slip op. (D.N.J. May 28, 2010), plaintiffs sought to bring a nationwide class action against Fujifilm, alleging that its FinePix 3800 camera had a soldering defect on the power board that could cause the camera to lose function intermittently or totally.  Plaintiffs brought various breach of contract and breach of warranty theories, as well as a claim under New Jersey's Consumer Fraud Act.

The court didn't even bother analyzing the Rule 23(a) factors, as it was able to conclude that the class was not certifiable under Rule 23(b)(2) or Rule 23(b)(3).

In analyzing whether an equitable relief class was proper under Rule 23(b)(2), the court quickly concluded that "Plaintiffs' main goal is to obtain monetary damages," and thus the monetary damages were not merely incidental to the claim for injunctive relief.  Indeed, plaintiffs sought "compensatory damages, statutory damages, punitive damages, and a refund of monies spent purchasing, repairing, and/or disposing of their cameras."  Slip op. at 5.  The court refused to certify the class under Rule 23(b)(2).

The court just as easily concluded that the proposed class could not meet the predominance standard of Rule 23(b)(3).  To begin with, this was not a product with a high failure rate.  Rather, the vast majority of putative class members had not experienced a product malfunction.  As the court noted, out of the nearly 300,000 cameras sold in a two-year period, the total return rate for any reason whatsoever was only 4%.  The number of cameras returned for any kind of power problem was only between 1% and 2%.  Thus, the vast majority of the class members had not experienced any product malfunction.  Moreover, there are a variety of potential causes for power problems with cameras, including:  "impact damage, water, a short circuit, extreme temperatures, blown fuses, tamper damage, normal wear and tear, or simply improper batteries."  Slip op. at 9-10.  Thus, even the small return rate was not per se evidence of a solder problem.

The court concluded that common factual issues did not predominate because the cases would devolve into individual determinations of whether the class member had experienced a "manifested" defect, since the law generally does not give consumers relief from so-called "unmanifested defects."  See id. at 6-8 (citing Chin v. Chrysler Corp., 182 F.R.D. 448 (D.N.J. 1998); In re Ford Motor Co. Ignition Switch Prods. Liab. Litig., 174 F.R.D. 332 (D.N.J. 1997); In re Cannon Cameras Litig., 237 F.R.D. 357 (S.D.N.Y. 2006)).

Plaintiffs had relied on an expert who examined the named plaintiffs' cameras.  He testified that the cameras had a joint solder defect that would cause power loss.  The court was unpersuaded that this was evidence of a defect in all cameras.  To begin with, the expert only examined the named plaintiffs' cameras, not any others.  He admitted that he could not determine how the solder fractures occurred or whether they even occurred in joints that were necessary for the camera's functionality.  He further admitted that he could not causally connect the fractures to any difficulties the named plaintiffs had experienced with their cameras.  And he admitted that "normal wear and tear" can contribute to "accumulating creep fatigue" in all solder joints in any soldered product over time.  This was not enough to prove a common defect among all cameras.  Slip op. at 10.

Plaintiffs also sought to rely on the fact that the defendant, in its troubleshooting guide, had indicated that a soldering problem might be a cause of power problems experienced with the camera.  But the inclusion of that potential cause was based on only one instance, and it was only one of many potential causes listed for power problems.  The troubleshooting guide was not enough to establish a common defect -- particularly where most customers used the product for the life of the warranty without experiencing any problem.

The court also concluded that common issues of law did not predominate.  Plaintiffs argued that because Fujifilm had its principal place of business in New Jersey, New Jersey law should apply to all plaintiffs' claims.  The court -- applying sections 6, 148, and 188 of the Restatement (Second) of Conflict of Laws -- held that the law of the plaintiffs' residences governed each transaction.  The court faulted the plaintiffs for not preparing an extensive choice of law analysis, which was their burden once it was clear that multiple states' laws might apply to the claims. 

The court held that state consumer fraud laws are too different to have common issues of law predominate:

For example, only thirty-three states have authorized injunctive relief under their consumer fraud statutes, thirty-four states required that a plaintiff plead an "ascertainable loss" with regard to consumer fraud claims, and many states have varying statute of limitations periods applicable to such claims.  Plaintiffs have not provided the Court with any method for managing such individualized issues of state law . . .

Slip op. at 16.

Similarly, the court held that the breach of contract/breach of warranty causes of action were too different to be tried together:

State laws regarding breach of express and implied warranty also differ greatly with regard to "(1) whether plaintiffs must demonstrate reliance, (2) whether plaintiffs must provide notice of breach, (3) whether there must be privity of contract, (4) whether plaintiffs may recover for unmanifested . . . defects, (5) whether merchantability may be presumed and (6) whether warranty protections extend to used [goods]."

Slip op. at 17 (citation omitted).

Judge Brown's analysis is spot on.  Where, as here, there is no widespread failure of a product, there simply is no reason for a class action.  As a practical -- as well as a legal -- matter, people whose product performs as expected throughout the warranty period are not entitled to damages or other relief for so-called breach of warranty or consumer fraud. 

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The Fourth Circuit recently issued an opinion highlighting the fact that product design often presents trade-offs, and that in comparing one product's performance to another, it is important to recognize those differences in order to preserve consumer choice. 

In Robinson v. American Honda Motor Co., 2009 WL 19132 (4th Cir. Jan. 5, 2009), the plaintiff had brought a class action alleging that the tires sold with the Odyssey Touring minivan were defective because they did not last as long as other tires.  This style of minivan came exclusively with Michelin PAX System tires with "run flat" capability:  "If a tire is punctured, the minivan can still be driven at speeds up to 55 mph for a distance of up to 125 miles."  Because of the PAX System's unique wheel-rim and tire combination, no other brand or model of tire will work on the minivan unless the wheels themselves are replaced.

The tire's treads are susceptible to rapid wear from wheel misalignment or mechanical irregularity.  Plaintiff complained that after having the minivan for 18 months and less than 18,000 miles of use, his tires experienced excessive wear on the outside edge of the tread.  He brought a class action against Honda and Michelin for breach of express warranty and breach of implied warranties.

The trial court, applying Maryland law, had granted the defendants' motion to dismiss, and the Fourth Circuit affirmed.

          Honda's Express Warranty

The car manufacturer had clearly, repeatedly and unambiguously excluded the tires from its limited warranty.  In three places it indicated that the tires were not covered under the warranty and that the tires had their own separate warranty.  The express warranty also stated that a "local representative of the tire's manufacturer" would be responsible for warranty service.

Nevertheless, plaintiff seized on the following statement in the warranty booklet to argue that the tires should be covered:  "By keeping your Honda in top condition, you will be rewarded with years of trouble-free service at the lowest operating cost.  The keys to keeping your Honda in top condition are proper operation and regular maintenance."  Plaintiff argued that because he had had all of the recommended maintenance performed by Honda, his need to replace tires in 18 months violated the promise of "years of trouble free service at the lowest operating cost."

The Fourth Circuit -- noting that the proffered phrase from the booklet was likely mere puffery -- observed that "lowest operating cost" is not "no" operating cost, and it did not cancel the very clear statements in the warranty booklet that the tires were not covered.  Accordingly, the court affirmed dismissal of the express warranty claim against Honda.

          Michelin's Express Warranty

Michelin's warranty covered the tires "against defects in workmanship and materials, for the life of the original useable tread or 6 years from the date of purchase, whichever comes first."  The warranty also had replacement provisions making it clear that the life of the warranty is measured by the life of the tread, not by a period of time or miles.  The Fourth Circuit affirmed the trial court's conclusion that there was no warranty whatsoever for tread wear, and thus affirmed dismissal of the express warranty claim.

          Implied Warranty Claims Against Honda and Michelin

UCC 2-314(1) requires that goods, to be merchantable, must "'[p]ass without objection in the trade under the contract description' and must 'be fit for the ordinary purpose for which such goods are used.'"

Plaintiff argued that the 18,000 mile tread life of his PAX System tires did not meet the 35,000 mile to 40,000 mile tread life of other tires, and thus his tires were not fit for their ordinary purpose and would not pass without objection in the trade.

The Fourth Circuit recognized, however, that in making comparisons under section 2-314, one must be careful to correctly define the product.  Here, the "product" for comparison was not "tires," but rather a subcategory of that product type:  "run-flat tires."  The court understood that properly defining the product for comparison is the key to preserving consumer choice:

Many different types of tires exist, each with a different purpose, a different design, and a different duration.  Passenger tires, touring tires, high performance tires, all terrain tires, and mud tires are all categories of automobile and light truck tires commonly driven on American roads.  When purchasing a specialized type of tire, consumers often choose to forego the longer tread life of standard passenger tires for special features such as increased grip or handling, a smoother ride, a lower profile, better aesthetics, or increased traction.

. . . Michelin PAX System tires provide a benefit -- increased safety -- at the cost of potentially shorter tread life.  As in the case of performance tires, the merchantability of Michelin PAX System tires cannot be determined by a comparison to standard passenger tires.  Instead, the merchantability of Michelin PAX System tires must be determined by examining whether these tires would "pass without objection in the trade" as run-flat tires.

Id. at *6 (emphasis in original).

The court thus affirmed dismissal of the implied warranty claims because plaintiff did not allege that his tires had a shorter tread life than other run-flat tires. 

Although it is hardly complicated, the decision in Robinson is an important statement of the court's properly limited role in second-guessing issues of product design, and a recognition that a broader reading of implied warranty rules can severely impair consumer choice:

To hold otherwise would require all automobile tires to last as long as the standard passenger tire and would elevate durability above all other considerations in the manufacture and design of tires.  This procrustean standard would severely limit the ability of tire and automobile manufacturers to create the specialized tires that consumers may desire.  The purchaser of a set of tires -- and not the courts -- should be given the power to decide what balance of durability, performance, special features, and safety is best suited to his needs.

Id.

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