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

In December I posted about Price v. Martin, in which the Louisiana Supreme Court expressly adopted the U.S. Supreme Court's analysis in Wal-Mart v. Dukes to reverse certification of a class of property owners who alleged that they were exposed to certain chemicals by a neighboring wood treatment facility.  In Price, the court recognized that there was no real commonality because establishing damages and causation would require individualized analysis.

Just last week, the Louisiana Supreme Court issued a per curiam opinion demonstrating that Price was not an anomaly.  In Alexander v. Norfolk Southern Corp., No. 11-C-2793, Slip op. (La. Mar. 9, 2012), the putative class action arose out of a chemical spill from a train in New Orleans in 2001.  The Fire Department investigation had established that ethyl acrylic fumes leaked from valves in two cars that were parked for less than an hour waiting for another train.  The firefighters tightened the valves, which solved the problem, and sent the trains on their way.  No evacuation was called.  Twenty people were treated at the scene for exposure and released.  Hundreds of other people complained of eye/nose/throat irritation and a noxious smell.  Naturally this spawned a class action, which was certified by the trial court and affirmed by the intermediate court of appeal.

The Louisiana Supreme Court, citing Price, reiterated that class certification requires a rigorous analysis and that there must be significant proof of a common question, the determination of which will "'resolve an issue that central to the validity of each one of the claims in one stroke.'"  Slip op. (quoting Price quoting Dukes).

The court ultimately premised its reversal on the lack of predominance of common issues, and the need for individual trials:

[T]he district court failed to take into account undisputed evidence in the record demonstrating that any determination of damages will be dependent upon proof of facts individual to each putative class member.  In particular, . . . plaintiffs' toxicologist testified that only those individuals with a unique susceptibility to ethyl acrylate would exhibit physical symptoms at the extremely low concentrations involved in the release, that this susceptibility would manifest itself in less than .1 percent of any given population, and determining whether any particular person was within this microcosm of the population would require an entirely individualized understanding of each person's health, medical history, records, and other variables impacting exposure.  In addition, [he] testified that the dose of exposure would be impacted by important individual variables, such as the specific location of the plaintiff at the time of exposure, and whether the plaintiff moved from location to location during the exposure.  Similarly, the defense toxicologist, . . . testified the symptoms complained of by the plaintiffs, such as irritation of the eyes and nose, respiratory irritation, coughing, nausea, and vomiting, are not specific or unique to ethyl acrylate exposure, but are common symptoms with a myriad of causes.

Given this testimony, it is clear that each member of the proposed class will necessarily have to offer different facts to establish liability and damages. . . . [T]he class would degenerate into a series of individual trials.

Slip op.

The decision in Alexander is a strong reminder that even in state court class actions, expert proof at the class certification stage is important because it can frame how the issues must be tried at trial.

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My colleague, John Beisner, is involved in this case, so I'll merely report the decision here.

This morning the Kentucky Court of Appeals reversed a trial court's certification of a class of Vioxx users who asserted a diminished value theory of recovery under various consumer fraud causes of action.  See Merck & Co. v. Ratliff, No. 2011-CA-000234-MR, Slip op. (Ky. App. Feb. 10, 2012).

The court embraced the "rigorous analysis" standard and cited Dukes.

The court held that the fraudulent misrepresentation and negligent misrepresentation causes of action presented too many individual issues that predominated over any common issues, making class certification reversible error.

Plaintiffs also had asserted a fraud-on-the-market theory.  The court observed that such a theory has been employed by other courts in the securities context to create a presumption that class members relied on the defendant's alleged misrepresentations.  But the court refused to import such a concept into Kentucky law, particularly in a consumer products case:

In the present case we have a corporate defendant that has allegedly disseminated false, fraudulent, or misrepresentative information into the marketplace.  However, while we have sympathy for the users of Vioxx whose physicians may have relied upon such false or incomplete information, the "fraud-on-the-market" approach has never been recognized in this jurisdiction for a fraud or misrepresentation case.  Further, every other jurisdiction we found which has been confronted with the theory has rejected it outside the securities litigation context. . . .

For this reason, we decline to recognize a similar theory here.  Causation, reliance, and damages are required to be shown on an individual basis.  Thus, if the action were tried as a class, after the common questions of Merck's representations in its marketing campaign were decided, the case would essentially fragment into a series of amalgamated "mini-trials" on each of these individualized questions. . . .

Thus, we find that common questions do not predominate.  Further, because these individualized questions would substantially overtake the litigation, and would override any common questions of law or fact concerning Merck's conduct, we find that a class action is not the superior mechanism by which to try these cases. . . .

Slip op. at 15-16 (citations omitted).

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Unjust enrichment is one of those "Hail Mary" passes that plaintiffs lawyers make when they have no other option.  Typically, it is the last cause of action pled in a complaint, following causes of action such as consumer protection statutes and common law fraud.  Often plaintiffs' counsel recognize that the more traditional theories present problems of proof that would make class certification difficult.  For example, common law fraud would require each claimant to prove injury caused by their reliance upon a specific misrepresentation.  That would present individualized issues that likely would preclude class certification.  Even for claims brought under a state consumer protection statute, each claimant often is required to establish causation, i.e., that a specific misrepresentation caused his damages.

So plaintiffs' counsel often reason that because the elements of "unjust enrichment" are loosely described and old decisions often use an "I-know-it-when-I-see-it" approach, "unjust enrichment" just might prove to be the catch-all theory that works where others fail.

In many states, unjust enrichment is not a cause of action, but rather is a type of remedy.  It basically is restitution.  In such states, the plaintiff often is required to prove an underlying tort. 

Last week the Seventh Circuit Court of Appeals issued an opinion addressing an attempt to use unjust enrichment as the basis for a class action involving Illinois smokers.  See Cleary v. Philip Morris Inc., No. 10-2960, Slip op. (7th Cir. Aug. 25, 2011).  This case was an extraordinarily clean presentation of the legal issues:  there was no underlying tort pled, and the plaintiffs expressly disclaimed the need for a claimant to prove that he or she was deceived, relied on the deception, or suffered any damages or injury whatsoever.  Rather, plaintiffs' position was that unjust enrichment focuses on the conduct of the defendant, and it allows for the disgorgement of all revenues derived from wrongful conduct.

The Seventh Circuit began by observing that the Illinois Supreme Court has treated unjust enrichment as its own separate cause of action in certain cases.  Accordingly, the Seventh Circuit would not hold that the claim should be dismissed because no underlying cause of action was pled.

Plaintiffs' theory of unjust enrichment was that the defendant earned revenues it should not retain by not disclosing that smoking is addictive and by failing to disclose that light cigarettes allegedly are as unhealthy as ordinary cigarettes.  They disclaimed any obligation to prove deception, causation, or actual harm to individual class members.

The court began by stating the elements of an unjust enrichment claim under Illinois law:

'[A] plaintiff must allege that the defendant has unjustly retained a benefit to the plaintiff's detriment, and that defendant's retention of the benefit violates the fundamental principles of justice, equity, and good conscience.'

Slip op. at 14 (citation omitted).

The court reasoned that by disclaiming any individual harm, plaintiffs failed to allege the key element of detriment:

But while a plaintiff need not show loss or damages, he must show a detriment--and, significantly, a connection between the detriment and the defendant's retention of the benefit. . . .

. . . But since the plaintiffs disclaim any need to allege either personal damages, deception, or reliance with regard to any member of the class, it is difficult to see how the defendants' retention of the revenue paid by a consumer is to that consumer's detriment.  According to the plaintiffs, the class of people with a valid unjust enrichment claim would include the consumer who bought cigarettes and never was injured in any manner by his purchase.  It would include the consumer who was satisfied by his cigarette purchase and planned to continue purchasing cigarettes.  It would include the consumer who would not have acted any differently had he been fully informed about cigarettes, but bought them anyway regardless of the defendants' marketing.  It would include the consumer who was not deceived by the marketing because he was personally aware of the true nature of cigarettes, but still bought cigarettes despite their addictive and harmful nature -- or even because of it. . . .

But for many of these consumers, the defendants' retention of the cigarette revenue is not a deteriment to them--it is possible that many of the consumers have no regrets about their purchases and would willingly complete the same transaction . . .  Since these consumers would have acted no differently had the defendants properly informed them about the true natures of cigarettes, their transfer of money to the defendants in exchange for cigarettes was not to their detriment--and, accordingly, the defendants' continued retention of the money cannot be to their detriment either.

Slip op. at 15-16.

Plaintiffs argued that they had a right to be informed about product risks, even if it would not have changed their behavior.  The Seventh Circuit flat out rejected this theory as a basis for unjust enrichment recovery:

[W]e hold that the mere violation of a consumer's legal right to know about a product's risks, without anything more, cannot support a claim that the manufacturer unjustly retained the revenue from the product's sale to the consumer's detriment.

Id. at 18.  The court noted, in a footnote, that compensating people who had suffered no detriment would drain a defendant's resources and thereby possibly prevent the defendant from compensating those plaintiffs who actually suffered an injury.

The Seventh Circuit's opinion is a strong explanation of why unjust enrichment cannot be used as a means of removing proof of individual deception, harm, and causation as an obstacle to class certification.

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Longtime readers of this blog may recall a post from a few years ago in which I reported on a jury verdict in which the maker of Louisville Slugger bats was held liable for failing to warn that a baseball hit with an aluminum bat can travel faster and with more force than a ball hit with a wooden bat.  The jury's verdict was puzzling, since the jurors held that the bat itself was not defectively designed.  Rather, liability was premised solely on a failure to warn.

Well, hard cases make bad law.  Winterbottom v. Wright (1842) M&W 109.  A few weeks ago the Montana Supreme Court affirmed the judgment against the bat maker, writing some dubious principles into Montana's law books.  See Patch v. Hillerich & Bradsby Co., 2011 MT 175 (July 21, 2011).

No one can deny that this was an extremely tragic case; a baseball struck an 18-year-old pitcher in the temple and killed him during a baseball game.  The all-too-human desire to award compensation for such a devastating loss is strong.  But the way in which the Montana Supreme Court allowed the jury's verdict to stand fundamentally undermines failure to warn law in Montana.

First, it's important to note that aluminum bats are not defectively designed products.  The jury didn't think so.  The American Legion didn't think so, as they authorized the bats for use in their league games.  And the coaches clearly didn't think so.  This was not a jury verdict that was premised on the notion that aluminum bats should not have been used in the first instance.

A failure to warn cause of action requires that there be:  (1) an information deficit -- i.e., something that the user did not know; (2) a duty on the part of the seller to inform the user -- i.e., to eliminate that information deficit; (3) a failure to meet that duty; and (4) causation -- the breach of the duty must have been an actual cause of the injury.

Here, the problem with the jury's verdict -- and the Montana Supreme Court's twisted opinion affirming it -- is that there was no information deficit and no "causation," as there was nothing that the manufacturer could have said that would have changed the players' use of the bat.  Arguing that the warnings should have resulted in the bat being banned from use in league games is tantamount to finding a design defect -- which is something that the jury did not do.

It is beyond cavil that there was no information deficit regarding the potential for serious injury.  Although aluminum bats may allow players to hit balls faster, harder and further than wooden bats (without the additional safety risk of the bat breaking, like wooden bats can do), they are specifically designed to minimize the bat speed advantage of aluminum over wood.  And certainly not all hits from aluminum bats are faster than wooden bats.  Indeed, as my prior post had noted, the ball that struck Brandon Patch was measured at 99.8 miles per hour, while nearly every home run hit with a wooden bat exceeds 100 miles per hour.  Even with wooden bats, a baseball that is hit hard travels at speeds that can cause serious bodily injury.

Baseball fans know this, as stadium signs and ticket stubs warn of injury from baseballs.  Pitchers definitely know this.  Accordingly, there was nothing to warn the players about.  They knew the sport of baseball presents a risk of serious injury from being struck by a ball regardless of the bat used.

The Montana Supreme Court, in its opinion, hides behind the notion that the "workability" of a warning is a jury question, but it never squarely addresses the fact that there simply was no information deficit that a warning could correct.  Indeed, it never even acknowledges what Justice Rice notes in his concurrence:  the plaintiffs never articulated for the jury what facts or instructions an "adequate" warning would contain. 

Again, the court discusses the red herring that a warning could have been provided in places other than a sticker on the bat -- such as by putting warnings in ads or media releases.  And it opines that "[s]uch warnings . . . would have communicated to all players the potential risk of harm associated with H&B's bat's increased exit speed."  Slip op. at 8.  But the court misses the fundamental point that plaintiffs failed to meet their burden to articulate the substance of what an adequate warning should have said that wasn't already known by the players.  They already knew that balls hit hard -- by aluminum bats, and even by wooden bats -- travel at speeds that can cause serious bodily harm.

The Montana Supreme Court also concocts an exception to the "causation" requirement, which requires a plaintiff to prove that the proposed warning would have altered the user's conduct in a way that would have avoided the injury.  Here, the court posits that because Brandon Patch is deceased, it would be "unfair" and "unjust" to apply a "self-serving 'magic words' requirement here."  Slip op. at 11.  Thus, the court applies a heeding presumption, holding that the jury could presume that Brandon "would have heeded a warning had one been given."  Id.  In fact, it articulates a rule of law for all products liability failure to warn claims where the product user is deceased, that "'the jury may be permitted to infer that a warning would have been heeded and that the failure to warn was a proximate cause of the injury.'"  Id. (citation omitted).

Of course, the problem is that there was no realistic way for Brandon to "heed" the plaintiffs' proposed unarticulated warning that fast balls hit by aluminum bats can cause serious injury.  What was he to do, given that aluminum bats were used in the league?  Urge the batter to hit the ball with less force?  As the pitcher, he already faced the same risk of injury from balls hit by wooden bats.  At best, plaintiffs might have suggested -- although it appears that they did not -- that "heeding" the warning would have meant not using the aluminum bat at all in league games.  But that is tantamount to a finding that the risks of the design outweigh its benefits and, as such, that conclusion would be wholly irreconcilable with the jury's determination that the bat was not defectively designed.

By not requiring the plaintiffs to identify the information deficit and specify precisely what warning should have been conveyed, and then ignoring the causation requirement by using a presumption that an unspecified warning would have been "heeded," the Montana Supreme Court appears to have bent the law to achieve a desired result.  But in doing so, it has created a problem that will recur in product liability cases in that state for years to come.

It also bears noting that the Patch case presented a question on the applicability of the assumption of risk defense.  By statute, the legislature has declared that there is no liability where "'[t]he user or consumer of the product discovered the defect or the defect was open and obvious and the user or consumer unreasonably made use of the product and was injured by it.'"  Slip op. at 12 (citation omitted).  That statute was subsequently interpreted by the Montana Supreme Court as not applying without evidence that, using a subjective standard, the victim knew he would suffer serious injury or death and still voluntarily exposed himself to the danger.  What does not appear to have been considered by the court prior to Patch was whether the assumption of risk defense would apply where the risk of harm was common knowledge.  The court in Patch reflexively applied the subjective standard, arguing that there was no evidence in the record of what Brandon knew.

This stands in stark contrast to the general rule applicable to spectators at baseball games.  See Walter T. Champion, Jr., Fundamentals of Sports Law, Section 6.3 (Nov. 2010) ("[T]he usual rule is that a spectator cannot recover for ordinary risks inherent to the sport."); Thurmond v. Prince William Professional Baseball Club, Inc., 265 Va. 59, 574 S.E.2d 246 (Va. 2003) (despite the subjective nature of the assumption of risk defense generally, surveying cases from across the nation to conclude with them that "as a matter of law, a spectator assumes the normal risks of watching a baseball game, which includes the danger of being hit by a ball batted into an unscreened spectator area").  If this is the rule for baseball spectators, one can imagine how obvious most courts would find the dangers to be to actual players. 

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As many of you recall, I've written a considerable amount about the anticipated opinion in Wal-Mart Stores, Inc. v. Dukes, No. 10-277 (U.S.).  See, e.g., here, and here.  Indeed, in a roundtable discussion over at Point of Law, I even included a wish list of what I wanted the Supremes to bring me from Wal-Mart.

Today, Justice Scalia delivered the opinion.  And it's like an 8-year-old's Christmas morning in my office! 

Dukes was an employment discrimination case in which the Ninth Circuit had affirmed certification of a class of roughly 1.5 million women who worked or had worked for Wal-Mart (in positions from management to custodian) in any of its roughly 3,400 stores across the U.S.  The allegation was that despite Wal-Mart's written non-discrimination policy, its managers (including women) discriminated against women in the exercise of their roughly unfettered individual discretion of whom to promote, demote and fire, as well as how they were compensated.  The class sought injunctive relief, as well as back pay for all class members.  (It disclaimed consequential damages.)

The majority opinion was written by Justice Scalia.  The opinion has a five-justice majority for some parts, and is unanimous in other parts.  Here is what Scalia Claus brought me this morning:

1.  A Unanimous Conclusion That Rule 23 Cannot Eviscerate Individual Defenses:  All nine justices joined in the part of the opinion holding that certification under Rule 23(b)(2) was improper because it included individualized claims for back pay.  A unanimous Supreme Court rejected a common attempt to impose statistical proof to cure the problem of individual defenses:

The Court of Appeals believed that it was possible to replace such proceedings with Trial by Formula.  A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a master.  The percentage of claims determined to be valid would then be applied to the remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery -- without further individualized proceedings.  We disapprove that novel project.  Because the Rules Enabling Act forbids interpreting Rule 23 to "abridge, enlarge, or modify any substantive right," a class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims.

Slip op. at 27 (emphasis added; citations omitted).  This means that third-party-payor claims and consumer fraud class actions will not be able to prove causation or reliance using statistical proof like that proposed and rejected in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008) in order to facilitate class certification.  This is BIG NEWS!!!

2.  A Unanimous Conclusion that Individualized Monetary Damages Claims Cannot Be Included in a Rule 23(b)(2) Class:  The Supreme Court brushed aside the whole question of whether money damages are "incidental" to the claims or "predominate," instead instructing that if monetary damages require individualized determinations, they do not belong in a 23(b)(2) class, but instead require the opt-out and notice rights inherent in a Rule 23(b)(3) class.  Slip op. at 21-23.  It refused to decide "whether there are any forms of 'incidental' monetary relief that are consistent with the interpretation of Rule 23(b)(2) we have announced and that comply with the Due Process Clause."  Slip op. at 26.  But this holding will make it very difficult for plaintiffs to continue the practice of attempting to plead cases about money as cases for so-called "equitable relief" with incidental damages.  Indeed, the court made it plain that Rule 23(b)(2) talks about injunctions and declarations, not "equitable relief."  As such, attempts to couch "disgorgement" or other so-called equitable remedies involving money as 23(b)(2) classes should be rejected from this point forward.

3.  Unanimous Dicta on Claim Splitting and the Potential for Issue Preclusion:  In discussing why it was improper for individualized back pay claims to be included in a Rule 23(b)(2) class, the Court observed that doing so "created the possibility . . . that individual class members' compensatory-damage claims would be precluded by litigation they had no power to hold themselves apart from."  Slip op. at 24.  Such as if the class received a judgment that there was no discrimination.  This part of the Dukes opinion will provide strong support for attacking (b)(2) classes that may impact monetary claims as lacking due process protections, and should strengthen classic adequacy-of-representation arguments based on claim-splitting.

4.  A Reinvigorated Commonality Standard:  Many courts had pretty much read commonality out of the Rule 23(a) analysis, concluding that if any common questions existed, the commonality standard was met.  No more.  The Court adopted the late Professor Richard Nagareda's characterization of commonality as the capacity of the class proceeding to generate common answers.  Slip op. at 9.  The Court instructed:

Commonality requires the plaintiff to demonstrate that the class members 'have suffered the same injury.'  This does not mean merely that they have all suffered a violation of the same provision of law. . . .  Their claims must depend upon a common contention -- for example, the assertion of discriminatory bias on the part of the same supervisor.  That common contention, moreover, must be of such a nature that it is capable of classwide resolution -- which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.

Id. (citation omitted).

5.  A Strong "Rigorous Analysis" Standard:  Stick a fork in Eisen v. Carlisle & Jacquelin.  It's done!  The majority once again declared that the class action proponent must actually prove each element of Rule 23, and embraced the Falcon "rigorous analysis" standard that courts must use to evaluate that proof.  Moreover, the Court explained:  "[f]requently that 'rigorous analysis' will entail some overlap with the merits of the plaintiff's underlying claim.  That cannot be helped."  Slip op. at 10.  Finally, the Court interred the long-dead (but often resurrected) canard that Eisen somehow precludes a look beyond the pleadings when deciding whether certification is proper.  Id. at n.6.

6.  A Strong Hint That Daubert Applies at the Class Certification Stage:  Plaintiffs had proffered testimony from a "corporate culture" expert who opined that there was a general policy of discrimination at Wal-Mart, although "he could not calculate whether 0.5 percent or 95 percent of [its] employment decisions . . . might be determined by stereotyped thinking."  Slip op.at 13.  As the Court observed, the "District Court concluded that Daubert did not apply to expert testimony at the certification stage of class-action proceedings."  Slip op. at 14.  The Court opined:  "We doubt that this is so."  But it did not need to reach the question because the testimony, even if fully credited, was "worlds away from 'significant proof' that Wal-Mart 'operated under a general policy of discrimination.'"  Id.  Below, the Ninth Circuit had refused to apply Daubert to expert testimony on class certification.  It seems unlikely that a court can ignore Daubert principles at class certification now.

So let's see what I had listed at Point of Law prior to the issuance of the Dukes opinion.  It looks like Scalia Claus brought me a majority of what was on my initial list.  Everything that is in Dukes from the original list is marked with an asterisk:

*1. District courts must give rigorous scrutiny to whether the class action prerequisites are met.

*2. Rule 23 is a procedural rule that cannot alter the substantive claims or defenses.

*3. You can’t use a mandatory class to elude the prerequisites for an opt-out class.

4. Money is not an available remedy under Rule 23(b)(2).

5. The canard that the need for individualized damages determinations cannot preclude class certification should be shot.

6. Intra-class conflicts fail the adequacy of representation requirement.

*7. Expert testimony merits particularly close scrutiny at the class certification stage. 

*8. Although courts should not reach to judge the merits at the class certification stage, they must decide merits issues where necessary to determine whether the class action prerequisites are met.

All in all, this was an extraordinarily useful opinion for class action defense counsel -- beyond even employment discrimination lawyers.

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Matt Richtel over at the New York Times has a real interest in the subject of auto accidents associated with driving while talking on or texting with a mobile phone, having written a whole series of articles called Driven to Distraction.  A little over a year ago, he wrote an article about a case in Oklahoma where a woman's estate sued Sprint/Nextel (the wireless provider) and Samsung (the phone manufacturer) for a death caused by their customer, who ran a red light while talking on his mobile phone.  The theory of liability was that the defendants' failure to warn the distracted driver of the dangers of driving while using his mobile phone caused the accident and the decedent's death. 

The article quoted a law professor talking about how compelling the claim was.  I, however, was included in the article, throwing cold water on the claim based on the common knowledge defense.  Subsequently, I wrote a blog post detailing more defense arguments, starting with the absence of a duty.  And I quoted the excellent decision on duty in this context, Williams v. Cingular Wireless, 809 N.E.2d 473 (Ind. App. 2004).

Well guess what?  The Oklahoma trial court ultimately granted the defendants' motion to dismiss the Oklahoma lawsuit.  It was then sent by expedited appeal -- with no new briefing -- to the intermediate appellate court, which affirmed the decision on December 9, 2010.  See Estate of Doyle v. Sprint/Nextel Corp., Case No. 108,648, Slip op. (Okla. Ct. Civ. App. Dec. 9, 2010).  On February 23, 2011, the Oklahoma Supreme Court decided not to hear the appeal and directed that judgment should be entered consistent with the lower court's decision.

The Court of Civil Appeals concluded that the wireless provider and the mobile phone manufacturer owed no legal duty to the plaintiff's decedent.  She was not their customer; they had no legal or contractual relationship.  Slip op. at 4.  The court relied heavily on Williams and the policy arguments made therein, including that court's conclusion that it was not legally foreseeable that the sale of a cell phone would result in a fatal automobile accident.  Id. at 7.  Moreover, the public policy against making mobile phone providers insurers against driver inattention "'would effectively require the companies to stop selling cellular phones entirely because the companies have no way of preventing customers from using the phones while driving.'" 

It bears noting that the court's analysis was solely of a negligence cause of action, because that is what plaintiff asserted.  But as the Restatement (Third) of Products Liability recognizes, there is no real difference between strict liability failure to warn and negligent failure to warn. 

The court also discussed the complete lack of causation -- which is the flip side of the foreseeability argument -- in light of the duties imposed on drivers by Oklahoma law to "devote [their] full time and attention" to driving, "use ordinary care to prevent injury," and "exercise ordinary care in keeping a lookout consistent with the safety of other vehicles."  Slip op. at 10.  Ultimately, however, the court refused to reach the causation question because it was unnecessary in light of the court's holding no duty existed as a matter of law. 

The Court of Civil Appeals' decision in Doyle is a strong demonstration that trying to use civil legal duties to make the US a Nanny State is simply wrongheaded.  Legal duty does not extend as far as foreseeability, and where statutes impose duties on drivers to avoid inattentive driving, product sellers are entitled to expect the driver to fulfill his legal obligations.  There would be no principled end to imposing a legal duty on mobile phone companies to prevent others' inattentive driving:  McDonald's would be vulnerable for their drive-in windows, cosmetics companies for their portable make-up, and Victor Kiam -- God rest his soul -- for battery-charged razors.  Public policy weighs against such onerous rules.  Legal responsibility for inattentive driving rests with the inattentive driver, which is as it should be.

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A few weeks ago I read Judge Carol Bagley Amon's opinion in the light cigarettes case, Caronia v. Philip Morris USA, Inc., Slip op., No. 06-CV-224 (CBA) (SMG) (E.D.N.Y. Jan. 13, 2011).  In that decision, Judge Amon granted the defendant's motion to dismiss a medical monitoring claim and its motion for summary judgment on breach of implied warranty.  It also held that the plaintiffs' motion for class certification was therefore moot.

But in making these rulings, Judge Amon predicted that the New York Court of Appeals would adopt a cause of action for medical monitoring and even articulated the elements of such a claim.  A look at her predictions is instructive.

(This light cigarettes case is not unlike the others that have been filed around the country.  Plaintiffs argue that the light cigarettes allowed smokers to compensate for the lower tar yield by drawing deeper on the cigarette.  The court had previously dismissed plaintiffs' strict liability and negligence claims for statute of limitations problems.  But the medical monitoring and implied warranty claims remained.  Plaintiffs argued that the defendant's conduct justifies a medical monitoring program that includes low dose computed tomography ("LDCT") scans to identify lung cancer.)

Judge Amon recognized that the question whether New York law permits an equitable cause of action for medical monitoring is a close one (slip op. at 6), and used intermediate appellate decisions to predict that New York's highest court, the Court of Appeals, would recognize such a cause of action.  The defendant argued forcefully that a present injury is a critical element of a tort claim in New York law.  The court rejected this argument, citing appellate decisions in which medical monitoring was allowed to asymptomatic plaintiffs as an element of consequential damages.  See slip op. at 8-9.

Judge Amon acknowledged that "the wisdom of these decisions expanding traditional theories of tort liability to permit asymptomatic plaintiffs to recover for medical monitoring is highly debatable."  Slip op. at 11 (collecting citations).  But she predicted that New York's Court of Appeals would adopt a medical monitoring cause of action:

The Court is persuaded that the New York Court of Appeals, given the opportunity, would likely permit asymptomatic plaintiffs to recover the sort of medical monitoring that the plaintiffs are requesting here:  a defendant-created and maintained comprehensive monitoring program.  This is so for several reasons.  First, New York's intermediate appellate and trial courts have uniformly adopted this rule, and the Court cannot lightly disregard that fact.  Second, the majority of other federal courts that have applied New York law to this question have concluded that the Court of Appeals would permit recovery.  Third, the New York Court of Appeals would not be alone, and would not even be at the vanguard, in permitting recovery of this sort.  Fourth, and finally, the Court notes that the fact that the plaintiffs are not asking for recognition of a right to a lump sum damage award to cover the supposed cost of monitoring eliminates some of the reasons to fear permitting asymptomatic plaintiffs a right to relief.

Slip op. at 12 (citations omitted).

The elements of such a cause of action, Judge Amon concluded, are:

(1) exposure at greater than background levels; (2) to a proven hazardous substance; (3) caused by defendant's tortious conduct; (4) as a proximate result of the exposure, plaintiff faces an elevated risk of contracting a serious latent disease; (5) a monitoring procedure exists that makes early detection possible; (6) the monitoring program is different than the program normally prescribed in the absence of exposure; and (7) the monitoring program is reasonably necessary according to contemporary scientific principles.

Slip op. at 13.

Judge Amon held that the statute of limitations on such a claim begins running (i.e., the medical monitoring claim accrues) when the standard of care of the reasonable physician first calls for medical monitoring.  In doing so, she rejected the defendant's statute of limitations arguments.

But Judge Amon ultimately rejected plaintiffs' medical monitoring claim as pleaded because of its failure to meet elements 3 and 6:  "caused by tortious conduct" and that the "monitoring program is different than the program normally prescribed in the absence of exposure."  The court held that "plaintiffs must plead and prove that Philip Morris's failure to produce and market a non-defective cigarette is the reason that the plaintiffs must now secure medical monitoring that includes LDCT scans."   Slip op. at 19.  The plaintiffs failed to do so:

Nowhere have the plaintiffs pleaded that if Philip Morris had marketed and designed the non-defective cigarette they describe, they would not have been exposed to harmful levels of tar.  Indeed, they concede that even had Philip Morris not acted tortiously and produced this less dangerous cigarette, the plaintiffs still would have been exposed to highly carcinogenic cigarettes. . . .  Additionally, . . . the affidavits of the plaintiffs' experts do not support a finding that physicians would not recommend monitoring that includes LDCT scans for individuals who have smoked non-defective Marlboro cigarettes for twenty pack-years.

. . . New York tort law . . . uses "substantial factor" to refer to the subset of but for causes that will be said to be the proximate legal cause of an actionable harm.  This view of New York causation law is consistent with New York product liability cases, which require that plaintiffs plead and prove that they would not have been injured by the non-defective product.

For these reasons, the Court concludes that the plaintiffs must have, and have not, pleaded that Philip Morris's tortious conduct is what caused them to be exposed to harmful smoke sufficient to require medical monitoring that includes LDCT scans.

Slip op. at 20-22 (citations omitted).

Put differently, unless the alleged product defect is a but-for cause of the need for medical monitoring, the defendant cannot be held liable for it.  If plaintiffs had smoked an allegedly non-defective cigarette, their experts still would have recommended medical monitoring for them.  Thus, it wasn't the defendant's allegedly defective product that caused the putative need for medical monitoring.  This is an important defense to medical monitoring claims.

Finally, it bears noting that the court granted summary judgment on the implied warranty claim.  Plaintiffs had conceded that they knew smoking presented risks, but they argued that they did not know that the defendant had the ability to produce a safer cigarette.  The court held that this "conflates what New York considers two distinct theories of liability and improperly inserts risk-utility considerations into the law of warranty."  Slip op. at 24.  Because plaintiffs knew there were risks from smoking, there was no implied warranty that Philip Morris breached.

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Reading a decision from the West Virginia Supreme Court often is like taking Mr. Toad's Wild Ride; you just never know where you might end up.  Last Friday's decision in White v. Wyeth, No. 35296, Slip Op. (W. Va. Dec. 17, 2010), is no different.

The West Virginia Supremes are the gang that not long ago rejected the traditional learned intermediary doctrine, holding instead that manufacturers of medicines have a duty to warn patients directly of the medicine's potential side effects.  See State ex rel. Johnson & Johnson Corp. v. Karl, 647 S.E.2d 899 (W. Va. 2007).

So one can be forgiven for being less than optimistic when hearing that the West Virginia Supremes, in a prescription hormone therapy class action, decided whether the plaintiffs had to demonstrate that they had relied on the alleged consumer fraud to their detriment in bringing a claim under West Virginia's Consumer Protection Act. 

As readers of this blog know, most states' consumer protection acts require the plaintiff to connect his or her injury to the defendant's allegedly deceptive activity.  Folks have different names for that requirement.  Some call it "reliance."  Others call it "causation."  But the bottom line is that the plaintiff cannot receive damages merely by proving that the conduct is allegedly deceptive; he or she must have actually been injured by it.

I'll admit, as I sank into my club chair with my afghan and hot cocoa with peppermint to read this decision, I was expecting the West Virginia Supremes to join the fringe decisions -- like the Ninth Circuit's decision in Yokoyama -- that read the causation requirement right out of the statute.  Boy, was I wrong!  Instead, here's what they did.

First, the court quoted the statute it was interpreting:

Any person who purchases . . . goods . . . and thereby suffers any ascertainable loss of money or property . . . as a result of the use or employment by another person of a method, act or practice prohibited or declared to be unlawful by the provisions of this article . . . may bring . . . [a civil] action . . . to recover actual damages or two hundred dollars, whichever is greater.

Slip op. at 2.  The fundamental question was what does the "as a result of language" require the plaintiff to allege and prove?  Reliance?  Or something else?  It was undisputed that the complaint did not allege that any of the plaintiffs or their doctors ever received, read, or relied upon the defendants' alleged misrepresentations about hormone therapy.

Plaintiffs argued that there was no reliance/causation requirement because elsewhere the statute defined deceptive practices as the "concealment, suppression, or omission of any material fact" with the intent that others rely on it "whether or not any person has in fact been misled, deceived or damaged thereby."  Slip op. at 8-9.

But as I had noted in response to Yokoyama, state consumer protection statutes were adopted in the late 1960s and early 1970s when people believed the FTC did not have enough resources to police consumer fraud.  They were modeled, in large part, on the FTC Act and various proposed uniform statutes.  But one HUGE difference between the FTC Act and state consumer protection statutes was that, for the most part, the state statutes gave individual citizens a private right of action.  (The FTC Act does not; enforcement power lies only with the FTC.)  Typically, that private right of action in state statutes was limited -- individuals could not sue to enjoin deceptive activity (that power was usually reserved to state authorities), but individuals could sue where they had suffered actual loss as a direct result of the allegedly deceptive conduct.  

This division of authority has important implications.  State authorities can sue to enjoin "deceptive activity" without having to prove that a single person lost money, so long as the activity is deceptive.  But individuals, who do not have that power, are bound by notions of constitutional standing to have an injury that was caused by the defendant's conduct.  Thus, in the clauses where a private right of action is created, the statute typically requires a loss of money or property "as a result of" the deceptive conduct.  This causation requirement is not just a statutory pre-requisite; in many states it is a constitutional precondition to having standing to sue.

The West Virginia Supremes recognized the standing requirements inherent in the Consumer Protection Act.  Slip op. at 12-13.  And it looked to what other states with similar language had held in interpreting their statutes.  Id. at 15-16.  The court recognized the interconnectedness of the concepts of "reliance" and "causation."  And it articulated a rule that will apply in other Consumer Protection Act cases in West Virginia:

[W]hen consumers allege that a purchase was made because of an express or affirmative misrepresentation, the causal connection between the deceptive conduct and the loss would necessarily include proof of reliance on those overt misrepresentations.  Where concealment, suppression or omission is alleged, and proving reliance is an impossibility, the causal connection between the deceptive act and the ascertainable loss is established by presentation of facts showing that the deceptive conduct was the proximate cause of the loss.  In other words, the facts have to establish that "but for" the deceptive conduct or practice a reasonable consumer would not have purchased the product and incurred the ascertainable loss. . . . Thus, a private cause of action under [the Consumer Protection Act] must allege:  (1) unlawful conduct by a seller; (2) an ascertainable loss on the part of the consumer; and (3) proof of a causal connection between the alleged unlawful conduct and the consumer's ascertainable loss.  Where the deceptive conduct or practice alleged involves affirmative misrepresentations, reliance on such misrepresentations must be proven in order to satisfy the requisite causal connection.

Slip op. at 17-18 (citations omitted).

So far, so good, right?  Well, after I read the next three pages of the opinion, you could've knocked me over with a feather.  The court concluded that West Virginia's Consumer Protection Act did not apply to the transaction at issue in White:  the purchase of prescription pharmaceuticals.  As the court explained it, "we are simply not convinced that a causal connection exists within the context of prescription drug purchases" because "the consumer can not and does not decide what product to purchase."  Slip op. at 18.  Citing a New Jersey case, the court reasoned that doctors make the prescription decision.  And citing a law review article by Victor Schwartz, the court noted that the high degree of federal regulation of prescription medicines means that the fundamental "gap-filling" purpose behind the Consumer Protection Act is absent.  Id. at 19.  The court then held:

[F]or the reasons stated above, we find that the private cause of action afforded consumers under West Virginia Code sec. 46A-6-106(a) does not extend to prescription drug purchases.  But see State ex rel. Johnson & Johnson Corp. v. Karl, 220 W. Va. 463, 647 S.E.2d 899 (duty of drug manufacturers to warn in context of product liability cases).  Consequently, upon remand of this case, an order of dismissal should be entered in keeping with this new point of law.

Id. at 19-20.

So just to recap, in West Virginia, the Consumer Protection Act does not apply to prescription products because of the physician's role in prescribing the medicine and the federal regulatory oversight of the medicine.  But, the prescription product manufacturer can be held liable for a failure to warn despite it having warned the physician of all potential side effects included in an FDA-approved package insert.

Wild and Wonderful . . . West Virginia.

The White decision was issued without dissent.  Two justices -- Chief Justice Davis and Justice Workman -- were disqualified and were replaced by judges sitting by temporary assignment.  Justice McHugh delivered the opinion of the court.

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My firm is involved in this case, so I'll stick to strict reporting, but last Friday the Neurontin MDL transferee issued an opinion granting summary judgment on the claims of a number of third party payors, as well as many (but not all) individual claimants.  See In re Neurontin Marketing and Sales Practices Litigation, MDL No. 1629, Civ. A. No. 04-cv-10891-PBS, slip op. (D. Mass. Dec. 10, 2010).

The plaintiffs in the case are so-called "third party payors" (or "TPPs") -- health and benefit funds, mostly -- who allegedly paid for their members' prescriptions for the anti-convulsant medicine Neurontin.  There are also some individual plaintiffs in the cases who actually used the medicine. 

The TPPs allege that the defendant engaged in consumer fraud and RICO violations by allegedly promoting Neurontin for off-label uses, such as pain management, thus allegedly causing the TPPs to pay for prescriptions that were not beneficial to the patients.  The individual plaintiffs claim their doctors would not have prescribed Neurontin to them if the defendants had not engaged in certain alleged misrepresentations about off-label uses of the medicine.  All of the plaintiffs seek to be reimbursed for the amounts they spent on Neurontin.

The defendants had moved for summary judgment, arguing, inter alia, that plaintiffs did not create a triable issue of fact as to causation.

The court granted summary judgment against each of the TPPs that the defendants had moved against.  (There was one other TPP that had alleged it directly received and relied on misrepresentations, and it had tried its claim to a plaintiff's verdict.)  In analyzing the summary judgment motion, the court first noted that, to establish a RICO violation, "plaintiffs must show both that defendants' mail or wire fraud in violation of the racketeering statute was a 'but for' cause of their injuries as well as a proximate cause."  Slip op. at 21 (citations omitted).  The TPPs pointed to aggregated proof that after doctors were approached by salespeople about the medicine, prescriptions rose significantly.  But the TPPs could not show which prescriptions were for off-label use, and they could not show which prescriptions were caused by misrepresentations and which were not.

(As we have noted before, off-label use of a medicine can be beneficial.  Doctors are allowed to prescribe medicines for uses that are not yet approved by the FDA, relying on such things as their patients' experience, the experience of colleagues in the medical community, and the available medical literature.)

The court followed the strong body of precedents that reject aggregate proof that does not address causation individually and specifically:

However, the Class TPP Plaintiffs have put forth no evidence as to which, if any, doctors were tainted by misleading information like 'Dear Doctor' letters or other marketing material.  There is no evidence in the record that any of the Class TPP Plaintiffs communicated directly with Pfizer in the development or evaluation of a drug formulary.

. . . [Merely correlating promotional spending to prescriptions] does not suffice to demonstrate the extent of harm caused by the fraud, as opposed to run-of-the-mill off-label detailing.  Most courts have rejected such aggregate proof.  The Second Circuit recently held, in a class action regarding sales and marketing of the drug Zyprexa, that where 'plaintiffs allege an injury that is caused by physicians relying on [a pharmaceutical company's] misrepresentations,' the injury cannot be shown by generalized proof. . . .

Because the Class TPP Plaintiffs have not directly relied on misrepresentations by defendants, and because they  have presented no evidence as to how many or which physicians who prescribed Neurontin to their members relied on fraud, they cannot establish causation.

Slip op. at 26-28 (citations omitted).

The court also analyzed the claims of 6 individual plaintiffs.  The treating doctors all had testified that they had not been influenced by any sales presentations by the defendant in prescribing Neurontin for these patients.  The court generally credited this testimony, granting summary judgment on the claims of 4 of the individual plaintiffs.  It denied summary judgment and found a triable issue of fact for 2 plaintiffs who could establish that their doctors had actually received a communication from the defendant that had been alleged in another trial to be misleading for the information that it had not disclosed.

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This is yet another case that serves as a reminder to defense lawyers not to neglect the class definition requirements -- which are not articulated in the class action rule -- when challenging class certification.

In Sevidal v. Target Corp., 2010 WL 4260891 (Cal. App. -- 4th Dist. Oct. 29, 2010), the plaintiff sued Target because he bought two pairs of running shorts and a tie that had been described on Target's website as "Made in the U.S.A.," when in fact they were not.  Plaintiff claimed this violated California's Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act, as well as constituted fraudulent concealment and unjust enrichment.  He sought certification of a statewide class of:

any California consumer who purchased any product from Target.com on or after November 21, 2003 which was identified on Target.com as 'Made in the USA,' when such product was actually not manufactured or assembled in the United States.

Id. at *2. 

The trial court denied class certification, and the Court of Appeal affirmed on two grounds.  First, it held that the class was unascertainable.  Second, it held that the class was impermissibly overbroad.

The ascertainability determination turned, in part, on the facts involving Target's website.  The "Made in the USA" designation was not seen by all users of the website who viewed the affected items.  Rather, it was in a subroutine of a subroutine of the program.  In other words, once one clicked on the product, one had to click on "View Details" and then "Additional Info" before the "Made in the USA" designation would appear.  Based on Target's 5-month test, 80% of customers did not click on the "Additional Info" tab at all and thus never could have seen the "Made in the USA" designation.

Moreover, the mis-designation as "Made in the USA" was the result of a computer bug that only sometimes would cause the mis-designation to appear.  In other words, sometimes the information displayed in "Additional Info" was correct, and sometimes it wasn't.  And Target had no record of who saw what.  Plaintiffs argued that this was Target's fault and should not impair a class, but the court observed that "Target had no contractual or statutory duty to maintain records pertaining to a consumer's selection of the 'Additional Info' icon."  Id. at *10.

Plaintiff relied heavily on In re Tobacco II Cases (2009) 46 Cal.4th 298, which held that absent class members subjected to a pervasive advertising campaign do not have to demonstrate reliance to obtain relief in a UCL class action.  The importance of Sevidal lies in its holding that Tobacco II does not excuse a UCL class action from meeting the other class action requirements, including ascertainability.  The court explained:

A class representative has the burden to define an ascertainable class.  Although the representative is not required to identify individual members, he or she must describe the proposed class by specific and objective criteria. Ascertainability is achieved "'by defining the class in terms of objective characteristics and common transactional facts making the ultimate identification of class members possible.'" . . .

"'Ascertainability . . . goes to the heart of the question of class certification," and "'requires a class definition that is precise, objective, and presently ascertainable . . . .'"  The purpose of the ascertainability requirement is to ensure it is possible "'to give adequate notice to class members'" and "'to determine after the litigation has concluded who is barred from relitigating.'"  The ascertainability requirement is satisfied if "the potential class members may be identified without unreasonable expense or time and given notice of the litigation, and the proposed class definition offers an objective means of identifying those persons who will be bound by the results of the litigation."

Sevidal, 2010 WL 4260891 at *7-*8 (citations omitted).

The Court of Appeal held that because the computer glitch did not consistently misidentify the goods as "Made in the USA," and because there was no record of who received the misidentifications, and because a substantial majority of those who used the website never visited the portions of the website where misidentifications could occur, the court held that the trial court was correct in finding that the class was unascertainable and thus could not be certified.  And the Court of Appeal observed that "[t]hese conclusions are fully consistent with Tobacco II's holding that UCL claims brought as class actions remain subject to the statutory class certification rules, including the requirement that the plaintiff show an ascertainable class."  Id. at *10.

The Court of Appeal separately held that the class was not certifiable because the class definition was overbroad.  The plaintiff argued that Tobacco II removed any causation requirement that absent class members demonstrate a loss caused by misconduct in order to be entitled to restitution under the UCL.  The Court of Appeals, in rejecting plaintiff's conclusion, focused on the language of Cal. Bus. & Prof. Code section 17203, which provides that parties are entitled to restitution "to restore to any person in interest any money or property, real or personal, which may have been acquired by means of the unfair practice."  Here, the court reasoned, the vast majority of the class never saw the misidentification of the goods because they never viewed the "Additional Info" area for a product on the website.  Thus, they definitively are not people from whom money "may have been acquired by means of the unfair practice," and thus cannot properly be part of the class.  As the court explained:

But the Tobacco II court did not state or suggest there are no substantive limits on absent class members seeking restitution when a defendant has engaged in an alleged unlawful or unfair business practice.  Instead, the court recognized that under the UCL's statutory language, a person is entitled to restitution for money or property which may have been acquired by means of the unfair or unlawful practice. . . .  Even after the Tobacco II decision, the UCL and FAL still require some connection between the defendant's alleged improper conduct and the unnamed class members who seek restitutionary relief.

Id. at *12.  The court relied heavily on Pfizer, Inc. v. Superior Ct. (2010) 182 Cal. App. 4th 622, 631, which held that "one who was not exposed to the alleged misrepresentations and therefore could not possibly have lost money or property as a result of the unfair competition is not entitled to restitution" under the UCL.

Because the class definition included primarily people who were not entitled to recovery under the UCL, it was impermissibly overbroad and the class could not be certified.

Sevidal is an important reminder that -- even in the face of substantive causes of action that loosen the restrictions on causation and reliance -- the class definition is still an important first line of defense against class certification.

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In late October, McDonald's finally got the break it deserved when the federal court presiding over the so-called obesity litigation against it refused to certify a class in the case.  See Pelman v. McDonald's Corp., 02 Civ. 07821 (DCP) (S.D.N.Y. Oct. 27, 2010).  A number of bloggers have already covered the subject admirably, including Sean Wajert.  I won't try to rework the ground they've already tilled.  But I did think there were a couple of things worth noting about the opinion.  

First, although the court began and ended its analysis on the predominance requirement of Rule 23(b)(3), this whole issue could have been decided -- and, arguably, decided more decisively -- on the class definition, which applied to the class period 1985 through 2002.  As the court noted, the class was defined as follows: 

New York State residents, infants, and consumers, who were exposed to Defendant's deceptive business practices, and as a result thereof, purchased and consumed the Defendant['s] products in New York State stores/franchises, directly causing economic losses in the form of financial costs of the Defendant's goods, causing significant or substantial factors in the development of diabetes, coronary heart disease, high blood pressure, obesity, elevated levels of [LDL cholesterol], and or other detrimental and adverse health effects and/or diseases as medically determined to have been causally connected to the prolonged use of Defendant's certain products."

Slip op. at 15-16 (emphases added).

That, my friends, is a failsafe class.  It requires a determination of both causation and the type(s) of injury before class membership can be determined.  As I have explained many times on this blog, membership in a class must be objectively determinable at the outset, and a class definition that requires merits determinations to determine whether a person is a member of the class is an impermissible failsafe class.  Indeed, if McDonald's were to have won at trial, who would have been bound by the judgment under this definition? 

These defects in the class definition are hardly curable.  As the court noted, New York's consumer protection statute (Section 349 of the General Business Law) gives a private right of action only to those who have been "injured by reason of" the challenged practices.  See id. at 5 n.4, 21, 22-24, 29-30; see also id. at 25 ("no necessary generalizable causal connection is manifest between the consumption of Defendant's products and the development of certain medical conditions"), 28 ("whether or not Plaintiffs' claims -- that they ate McDonald's food because they believed it to be healthier than it was in fact -- are true for any particular person is an inquiry which also requires individualized proof").  Thus, as Judge Denise Cote recently recognized in the Snapple litigation, establishing membership in a Section 349 class would still require individual proof the the representation caused the alleged harm.

The second point that I thought was worth noting is that, although the court correctly decided that this case was not suitable for certification of an issues class, it appears to rely on a numerosity argument to do so.  See Slip op. at 40-42.  That seems particularly odd to me, given how much of the rest of the opinion is devoted to a discussion of how many issues there are that will need to be proved individually for each class member.  Even the Second Circuit -- which previously had approved an issues class in the Nassau County Strip Search case -- has recognized in the consumer fraud/product liability context that the certification of an issues class does not sufficiently advance the ball toward liability to justify certification of those common issues that may exist.  See McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008) ("Certifying, for example, the issue of defendants' scheme to defraud, would not materially advance the litigation because it would not dispose of the larger issues such as reliance, injury, and damages."); accord In re St. Jude Medical, Inc., 522 F.3d 836 (8th Cir. 2008).

McDonald's certainly deserves kudos for prevailing in this bogus class action.  But there are many other strong grounds for denying certification in this case besides those that were cited by the court in its opinion. 

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A number of prominent, scholarly people keep trying to explain why aggregate proof of causation should be allowed in order to facilitate class action litigation.  Judge Jack B. Weinstein has done it in his opinions.  Professor Sam Issacharoff has written about it.  And many deans of the plaintiffs' bar have argued for it.

But nobody has been able to explain to my satisfaction how one uses Rule 23 -- which is not supposed to (and constitutionally could not) alter the substantive elements of claims or defenses -- to deprive a defendant of the right to challenge each class member on the element of legal causation, where such factual challenge would be possible if the class members sued individually. 

Recently, the Second Circuit took up the question of aggregate proof in a third-party payor case against a pharmaceutical company.  In UFCW Local 1776 v. Eli Lilly & Co., No. 09-0222-cv, Slip op. (2d Cir. Sept. 10, 2010), union health benefit plans and other third-party payors for plan members' prescriptions sued the maker of Zyprexa in a class action lawsuit, alleging RICO violations, common law fraud, unjust enrichment, and violations of state consumer protection statutes.  In a lengthy opinion, Judge Jack B. Weinstein had certified a class of third-party payors on the theory that they had paid a higher price for Zyprexa than they would have if the maker had not allegedly misrepresented certain product risks and promoted the medicine for unapproved uses.  Professor Issacharoff defended the certification on appeal, arguing for aggregate proof of causation.

The Second Circuit reversed, and in doing so, had some important things to say about aggregate proof.  The court noted that the market for prescription medicines involves lots of intermediaries:

[D]irect exchanges between consumers and producers are rare.  An individual patient does not choose what drug to take; she is prescribed a drug by her physician.  Nor does the individual patient always pay directly for that drug.  Rather, a TPP, such as her insurance provider, often pays some or all of the drug's cost.

. . . The [TPP's] formulary is usually managed by a Pharmacy Benefit Manager ("PBM"). . . . Drugs placed on a formulary are approved by the PBM's Pharmacy and Therapeutics Committee, made up of physicians and clinical pharmacists. . . .

[I]n the market for prescription drugs, three sets of price negotiations exist:  "(1) retail pharmacies and nonretail providers negotiate with pharmaceutical managers and wholesalers, (2) payors (often through PBMs) negotiate with pharmaceutical manufacturers and wholesalers, and (3) payors negotiate with retail pharmacies and nonretail providers.  The negotiations over price, moreover, do not intersect with the therapeutic choice of what drug a patient should take, which is a decision made by a physician with only minimal input by her patient or the TPP.

Slip op. at 9-10.

It was precisely because of these intermediaries -- and the independent way in which they make their decisions -- that the court held that "but-for" causation could not be the subject of aggregate proof.  Because doctors consider things other than a manufacturer's statements about the efficacy and side effects of its medicine when they are deciding what medicine to prescribe, reliance could not be presumed for each prescription.  Id. at 26.

The court also rejected plaintiffs' theory of proximate cause -- namely, that because the manufacturer put out alleged misrepresentations, the doctors necessarily relied on them to prescribe more of the medicine and the TPPs paid for it.  The court explained:

This narrative skips several steps and obscures the more attenuated link between the alleged misrepresentations made to doctors and the ultimate injury to the TPPs.  In fact, if plaintiffs' factual allegations are correct, the chain of causation runs as follows:  Lilly distributes misinformation about Zyprexa, physicians rely upon the misinformation and prescribe Zyprexa, TPPs relying on the advice of PBMs and their Pharmacy and Therapeutics Committees place Zyprexa on their formularies as approved drugs, TPPs fail to negotiate the price of Zyprexa below the level set by Lilly, and TPPs overpay for Zyprexa. . . .  [P]hysicians, PBMs, and PBM Pharmacy and Therapeutics Committees all play a role in the chain between Lilly and TPPs.

Id. at 27.

The court also noted that doctors rely on a variety of sources for information about medicines other than the manufacturer, including their own knowledge and experience.  Because it was possible -- indeed, even probable -- "that at least some doctors were not misled by Lilly's alleged misrepresentations" and thus did not fall within plaintiffs' theory, the court concluded that "[t]his makes general proof of but-for causation impossible."

Plaintiffs' counsel keep trying to import the concept of aggregate proof from securities litigation, where the presumption of an efficient market suggests that information that is disclosed about a product necessarily affects its price.  But that is not how the markets for consumer goods work.  Disclosures do not move markets.  People buy consumer goods for a variety of reasons -- even irrational ones.  The Second Circuit stressed that fact in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008).  And a defendant accused of consumer fraud is allowed to challenge each person's decisionmaking process and to prove that nothing it said harmed the plaintiff.  The fact that it is a class action in which the allegations are made does not change that simple fact. 

Hopefully the recent decision in Local 1776 puts the aggregate proof concept to rest in consumer class actions.  But it probably won't.  My colleagues on the other side of the "v" are creative and indefatigable.  As for me -- I'll keep my focus on the fact that Rule 23 doesn't change the substantive rules, no matter what.  And as long as one can demonstrate independence of thought and action in the consumer marketplace, the concept of "aggregate proof of causation" or a "presumption of reliance" amounts to a change of the substantive rules just to facilitate class certification.  And that's just wrong.

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This is the way an MDL ends:  not with a bang, but a whimper.

My apologies to Eliot, but this bastardization of The Hollow Men seemed appropriate in this instance.  Today we feature two decisions that -- although they are marked "not for publication" -- clearly demonstrate the hollowness of consumer and third party actions based on the "diminished value" theory. 

Law360 reported yesterday (subscription required) that Judge Stanley R. Chesler of the District of New Jersey finally pulled the plug on an MDL begun in 2006 involving claims that Schering-Plough Corp. engaged in unlawful off-label promotion of its medicines Intron-A and Temodar.  In one opinion, he dismissed a putative consumer class action involving the medicines.  In re Schering-Plough Corp. Intron/Temodar Consumer Class Action, No. 2:06-cv-5774 (SRC) (D.N.J. June 9, 2010) (the "Consumer Slip Op.").   In the other, he dismissed a putative class action involving third party payors -- various insurers and union health benefit plans.  In re Schering-Plough Corp. Intron/Temodar Consumer Class Action, No. 2:06-cv-5774 (SRC) (D.N.J. June 9, 2010) (the "TPP Slip Op.").

Last summer, Judge Chesler had dismissed the complaint in these actions, giving the plaintiffs leave to amend.  See In re Schering Plough Corp. Intron/Temodar Consumer Class Action, 2009 WL 2043604 (D.N.J. July 10, 2009).  The opinion was a lengthy discussion of why neither the consumer class action nor the TPP class action pled viable claims.  Last week's opinions reiterate that analysis and formally pronounce the death of the litigation.

In the consumer class action, the named plaintiff had suffered from Hepatitis C, but was asymptomatic.  Her doctor originally recommended against treatment with Schering's medicines.  Subsequently, however, the doctor changed his mind and recommended treatment with a combined prescription of Schering's medicines.  Plaintiff alleged in the complaint that she suffered from some of the medicines' side effects and lost weeks of work.  The medical records reflected that the doctor discussed with plaintiff the risk of side effects.

Plaintiff's complaint had all sorts of allegations of off-label promotion of the medicines.  Schering had pled guilty to a criminal information involving off-label promotion of the medicines, and plaintiff incorporated the whole criminal information in her complaint by reference.  She also incorporated by reference the entire complaint in a civil qui tam action. 

Applying Iqbal, the court held that plaintiff did not have Article III standing to sue because she did not plead any facts to support the notion that Schering's conduct actually caused her injury.  The court held that general allegations of off-label promotion don't cut it, since doctors may lawfully prescribe medicines for off-label purposes and, although off-label promotion may violate an FDA regulation, it is not inherently false.  In any event, there were no facts pled suggesting that plaintiff's doctor relied on false statements made by Schering in prescribing the medicines.

Similarly, the court observed that although there were generic allegations that Schering paid kickbacks to doctors to prescribe its medicines, there were no allegations that it did so to plaintiff's doctor or that such kickbacks made him change his mind on prescribing the medicine.  Consumer Slip Op. at 14-15.  The court reiterated that it need not credit bald assertions or legal conclusions, but need only look at facts pled in the complaint, and those were sorely lacking.

The court also instructed that because the complaint referred to plaintiff's medical records, the court could properly look to the medical records on a motion to dismiss.  Those records suggested other plausible reasons besides fraud why plaintiff's doctor made the prescription.  Accordingly, the plaintiff had failed to meet her burden under Iqbal, and the court dismissed the consumer class action for lack of jurisdiction.

The Third Party Payor action was particularly interesting, because there the plaintiffs had whittled their claims down from nine causes of action to just four:  RICO, New Jersey's mini-RICO statute, a common-law claim for tortious interference with contract, and unjust enrichment. 

In its opinion last summer, the court had rejected the TPP plaintiffs' RICO pleading because it basically pled that the TPPs had suffered injury by paying for medicines that were used off label.  The court explained that off-label use is not necessarily false or non-beneficial, even if it was done as a result of a promotion that violated FDA regulation.  It had established what TPP plaintiffs must plead to state a viable claim for diminished value:  "that Named Plaintiff TPPs paid for Subject Drugs that were inferior and/or worth less than what Plaintiffs paid."  TPP Slip. Op. at 9 (referring to earlier opinion).  The court had explained that "[t]he inferiority of the product could be alleged, for example, by pleading facts asserting that the drug was either ineffective for the indication for which it was prescribed or [that it was] unsafe."  Id.

The TPP plaintiffs did not plead this, however.  At best they pled that Schering did not have the science to prove the effectiveness of the medicines for off-label uses.  That is tantamount, the court said, to giving a private right of action to enforce the Food, Drug and Cosmetics Act, which is something that courts cannot do.  Id. 

The court also rejected the invitation to adopt a "fraud on the market" theory, i.e., that by promoting its medicines for off-label use, Schering drove up the demand for the products and thus inflated the prices that TPPs paid. 

Aside from not having an injury, the TPP plaintiffs had no causation -- i.e., they could not attribute any harm they received as being caused by the actions of Schering.  The TPP plaintiffs asked the court to assume that there was such causation:

Named Plaintiffs, in short, allege that the deliberately widespread nature of Defendants' marketing scheme supports the inference that some portion of prescriptions for the Subject Drugs paid for by the TPPs were written for off-label indications as a result of Schering's unlawful marketing.

TPP Slip Op. at 13.  But the court noted that none of the named TPPs linked a single prescription that it paid for to a single instance of alleged misconduct by Schering.  Not one doctor was identified who prescribed because of alleged kickbacks, or as a result of fraudulent misrepresentations.  Moreover, the amended complaint failed to plead that the medicines were actually unsafe or ineffective for the off-label purposes for which they were prescribed.  As a result, the court held that the TPPs failed to plead facts to establish standing to bring a federal or New Jersey RICO claim.  TPP Slip Op. at 21-22. 

The court made quick work of the TPP plaintiffs' common law claims.  First, it noted that the TPP plaintiffs failed to allege that their contracts with their plan members were actually breached.  As a result, they could allege no interference with contractual relations.  Similarly, there could be no "unjust enrichment" where there was no other underlying cause of action. 

Once again, Judge Chesler's opinions demonstrate that "diminished value" claims lack substance, particularly in the context of the alleged overpromotion of medicines for off-label use.  Plaintiffs deliberately plead these claims vaguely, and for good reason:  if they actually acknowledged that they must show injury and causation on a prescription-by-prescription basis, it would be obvious that these claims never could be tried as class actions.  Thus, for the sake of attempting to reach a class action jackpot, plaintiffs refuse to plead any facts that might possibly establish the individual's standing to bring a claim.

Judge Chesler's opinions suffer from only one apparent flaw:  they should be designated for publication.  This is particularly true for opinions that mark the end of a multi-year class action pleading battle. 

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The Eighth Circuit recently issued a Daubert opinion that provides a good reminder that in toxic tort cases, experts must pay attention to issues of actual exposure and dose before they can have an admissible opinion on "specific" causation (i.e., that the plaintiff's exposure to the chemical caused his injury).

In Barrett v. Rhodia, Inc., No. 09-3115, Slip op. (8th Cir. May 24, 2010), the plaintiff worked for a company that disposed of hazardous waste.  Plaintiff's job was to assist in ash fixation -- making waste materials stable enough to be disposed of in landfills.  Plaintiff worked in a three-story facility with steel grating floors.  One of his co-workers would open a barrel of phosphorus pentasulfide and load it into a chute on the third floor.  Plaintiff's job was to open the door of the chute on the second floor and let the phosphorus pentasulfide flow down to the first floor, where the waste materials awaited treatment.

Phosphorus pentasulfide is a powder that defendant delivered in barrels.  It reacts with water and water vapor, forming toxic hydrogen sulfide gas.  If the dust is enhaled, it interacts with moisture in the lungs to form the gas.  High concentrations of hydrogen sulfide gas (500 to 1,000 ppm) can cause unconsciousness and death.

Because of its known toxicity, OSHA advises that workers who use the chemical wear protective clothing and a self-contained breathing apparatus.  On the date in question, the employee on the third floor wore a breathing apparatus, put plaintiff and his colleagues on the lower floor did not.  The employee on the third floor loaded the chute.  When plaintiff went to open the second-floor chute, he collapsed.  He subsequently was diagnosed with dementia resulting from lack of oxygen to the brain.

Plaintiff's employer hired someone to investigate the incident.  They opened the drums of phosphorus pentasulfide and found hydrogen sulfide gas in the headspace of the drums at a concentration as much as 5,500 ppm. 

Plaintiff sued the defendant chemical supplier, claiming that the drum was defectively designed to allow hydrogen sulfide to build up in the headspace and that defendant failed to warn of the risk of harm from hydrogen sulfide in the headspace of the drum.  Plaintiffs' experts were prepared to testify that it was the act of third floor employee in opening the drum that caused plaintiff to be exposed to enough hydrogen sulfide to pass out and be injured.

Defendant moved to exclude plaintiff's expert testimony under Daubert, arguing that although some of the experts might be qualified to testify to general causation -- i.e., that hydrogen sulfide can cause the type of injury that plaintiff has -- none were able to testify to specific causation with the requisite degree of scientific reliability because they did not establish that plaintiff was exposed to hydrogen sulfide from the drum's headspace and, if so, in what dose.  In fact, the defendant hired its own expert who conducted drum opening experiments in the employer's facility, including gas dispersion calculations to determine how much hydrogen sulfide gas a person standing twelve to fourteen feet below the drum (on the second floor) would receive.  Defendant's expert concluded that the plaintiff could not have been exposed to a sufficient concentration of hydrogen sulfide gas to cause plaintiff's reaction.  The defendant's expert concluded that the more likely explanation was that plaintiff -- who wore no breathing apparatus -- inhaled phosphorus pentasulfide dust when he tried to open the chute.  This, of course, was a danger that was amply warned about.

Plaintiff's primary expert was an experienced allergist who was board certified in toxicology.  She had never treated anyone with exposure to hydrogen sulfide gas.  And she "conceded that she did not know how hydrogen sulfide disperses, the distance between [plaintiff] and the . . . drum alleged to be the source of the gas, or the concentration of hydrogen sulfide gas, if any, in the drum."  Slip. op. at 8.  She also testified that she did not rule out other potential causes of plaintiff's injury -- such as the inhalation of phosphorus pentasulfide dust -- prior to forming her causation opinion, which she admitted was "based on assumption, without any scientific testing or analysis."  Slip op. at 8-9.

The court stressed that "[t]he plaintiff in a toxic tort strict liability case needs to establish causation through expert testimony," which in this case meant both general causation and "that [plaintiff] was exposed to hydrogen sulfide gas which dispersed from the . . . drum manufactured by [defendant] in sufficient concentration to cause his injuries."  Slip op. at 7.  Without admissible expert testimony on this point, plaintiff failed to establish a prima facie case.

The court affirmed the trial court's grant of summary judgment for the defendant based on plaintiff's failure to offer admissible expert testimony on specific causation:

[Plaintiff's experts] had presented insufficient evidence, and no expert evidence, on specific causation.  They had not shown that hydrogen sulfide gas released from [defendant's] drum was the source of [plaintiff's] injuries.  The [district] court also noted that appellants had offered no evidence to refute [defendant's] expert, who had testified in his deposition on the basis of chemical analysis and modeling that [plaintiff] had actually inhaled [phosphorus pentasulfide] dust as a result of not wearing any protective equipment.

Slip op. at 13. 

Plaintiffs tried to rely on temporal relationships and the employer's investigator's finding of gas in the drums to get to a jury on the question of specific causation.  But the Eighth Circuit said no; expert proof on dose and exposure is required in toxic tort cases:  "Although a mathematically precise quantification of exposure level is not required, [plaintiff and his employer] were required to present expert evidence that [plaintiff] was exposed to toxic levels of hydrogen sulfide gas, as opposed to [phosphorus pentasulfide] dust."  Slip op. at 14.

Barrett is a strong reminder that experts must do their homework on the basic questions of exposure and dose, and work to eliminate potential alternative causes, in order to have admissible testimony that meets a plaintiff's prima facie burden of proof in a toxic tort case.

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U.S. District Judge Lee Rosenthal in Houston -- the Chair of the Judicial Conference Committee on Rules of Practice and Procedure -- recently Issued a very thoughtful opinion analyzing the Alien Tort Claims Act and other statutes in a case brought by victims of 21 terrorist attacks in Israel during the Second Intifada and their families against oil companies that bought and sold Iraqi oil.  See Abecassis v. Wyatt, 2010 WL 1286871 (S.D. Tex. Mar. 31, 2010).  The 193 plaintiffs' theory was that payments from the oil sales were diverted by Saddam Hussein to secret accounts in Jordan that Hussein subsequently used to pay rewards to the families of the suicide bombers in each of the 21 terrorist attacks.  Defendants thus allegedly "violated international law by financing terrorism and by aiding and abetting and conspiring to commit acts of genocide and crimes against humanity."  The complaint did not name as defendants Saddam Hussein, Iraq, the terrorist organizations, or the individual terrorists who carried out these attacks.

Most of the plaintiffs were aliens and asserted claims under the Alien Tort Claims Act.  The U.S. nationals asserted a claim under the Antiterrorism Act ("ATA").

Judge Rosenthal's opinion describes in careful detail the United Nations economic sanctions that were imposed on Iraq in the 1990s and the UN's "Oil for Food Program," in which Iraq was allowed to make limited oil sales in exchange for funds that would be deposited in an account that could only be used to buy food and medicines for the Iraqi people.  The complaint alleged that many of the companies and individuals that Iraq chose to receive allocations to buy Iraqi oil were not really oil companies and made huge profits by selling their oil allocations to brokers and others able to transport the oil to a refinery.  These companies -- defendants in the action -- allegedly secured their allocations by making side payments to Hussein's secret accounts.

As I have explained before in prior posts, the Alien Tort Claims Act gives federal courts jurisdiction over certain violations of "customary international law," but that jurisdiction is severely limited.  When the ATCA was first adopted in 1789, the recognized violations of "customary international law" that it covered were:  (1) piracy, (2) interfering with a nation's "safe conduct" request for one of its citizens, and (3) assaulting or impeding a nation's ambassador.  Since the 1980s, however, litigants have sought to broaden the scope of "customary international law" covered by the ATCA, as well as the type of "people" who may be sued under the Act.  It is this fundamental tension that presents judges like Judge Rosenthal with difficult questions indeed.

In Abecassis, the defendants moved to dismiss the case for lack of Article III standing.  Citing Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992), Judge Rosenthal observed that constitutional standing to bring a claim requires an "injury in fact" that is both "concrete and particularized" and "actual or imminent," a causal connection between the injury and the challenged conduct; and the likelihood that a favorable decision would redress the alleged injury.  The defendants' motions to dismissed challenged the second element -- causation -- arguing that plaintiffs failed to show that their injury was "fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court."  Id. (quoting Lujan).

The defendants argued that plaintiffs' injuries resulted from the independent acts of the terrorists and, perhaps, of Saddam Hussein, but certainly not as the result of their purchases of oil.  The plaintiffs responded that because they pled the defendant oil companies were accessories and aidors and abettors to genocide and crimes against humanity, rather than direct tortfeasors, they did not have to plead "but for" causation, i.e., that their injuries would not have happened but for the oil purchases.  Rather, they allege, they need only plead that the oil companies gave substantial assistance to the direct tortfeasors.

There have been ATCA cases that have gone both ways on the question of aiding and abetting liability, and Judge Rosenthal carefully analyzed them.  Ultimately, she concluded that the injuries pled were not fairly traceable to the defendants, and plaintiffs thus failed to allege constitutional standing to bring their ATCA claim:

The plaintiffs here allege that the Hussein government caused their injuries by making payments to suicide bombers' families, which encouraged future suicide bombings.  It is speculative whether the bombings that injured the plaintiffs and their family members are fairly traceable to Hussein's prior payments to families of other suicide bombers.  It was the suicide bombers and the terrorist organizations that decided to carry out the specific attacks, not the Hussein government, not the third party that bought Iraqi oil, and not [the defendant that held the allocation for the oil].  The suicide bombers were independent of [the defendant].  The injuries caused by those bombers are not fairly traceable to [the defendant].

. . .

. . . The plaintiffs here have not alleged a direct relationship between [the defendants] and the principal tortfeasors, the suicide bombers.  There were independent third parties between Iraq and the plaintiffs. . . .  Even if [the defendants were] not independent of Hussein because of the aiding and abetting allegations, it was the third party oil sellers' decision to mark up the oil price to pay kickbacks and it was the terrorists' decisions to carry out the attacks.  What these actors would have done without [the defendants'] involvement is speculative.  The causation prong of the standing test is not met.

Id. at *16. 

Judge Rosenthal also analyzed whether the ATCA claims stated a claim under Rule 12(b)(6), concluding that they did not.  She looked to international law to determine whether there was a sufficient international norm for recognizing "secondary liability" (or "aiding and abetting" liability) for the torts pled.  She held that there was not, and that the complaint failed to plead that the defendants even knew that their kickbacks paid through the Oil for Food Program were being used to fund attacks in Israel -- let alone any intention that they do so.  She held that "[t]he allegation would have to be that the defendant acted with the purpose of assisting terrorists to murder or maim innocent civilians."

In analyzing the claims of the U.S. nationals under the Antiterrorism Act ("ATA"), Judge Rosenthal assumed -- without deciding -- that plaintiffs had pled standing under the liberally drafted statute, but dismissed the claim (with leave to replead) for failure to plead a cognizable claim under Rule 12(b)(6).

The ATA makes it a federal crime to "provide[] material support or resources . . . knowing or intending that they are to be used in preparation for, or in carrying out" a violation of the section that makes it a crime to kill, conspire to kill, or inflict bodily injury on a U.S. citizen abroad.  18 U.S.C. sec. 2339A.  Judge Rosenthal relied upon the Seventh Circuit's recent en banc decision in Boim v. Holy Land Foundation (Boim III), 549 F.3d 685 (7th Cir. 2008), which "held that anyone who provides material support -- not necessarily substantial support -- to a terrorist organization, directly or indirectly, with knowledge that the organization carries out attacks in Israel (or with recklessness as to the truth of this fact), is liable under the ATA to an American (or his estate) injured in Israel by that organization."

After a lengthy exposition of the cases analyzing the ATA and the type of causation that it requires, Judge Rosenthal ultimately concluded that whatever the standard is, the plaintiffs had failed to meet it here because they had not alleged that each defendant knew that the oil it was buying was tied to a kickback to Saddam Hussein and that Hussein was using that money to fund terrorism targeted at U.S. nationals.  Indeed, the complaint cited a news story from the time indicating Hussein was using the money to fund his army and his luxurious lifestyle, mentioning nothing about paying suicide bombers.  Moreover, there were no allegations of an agreement among the "co-conspirators" to fund or otherwise support terrorism targeting Americans.

Judge Rosenthal's opinion is an excellent example of the cautious approach judges should take to claims brought under the Alien Tort Claims Act and other statutes that, if abused, could drag American corporations into costly "secondary liability" lawsuits over tortious violence committed by direct actors who have not been held to account for their actions.

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Continuing that long line of cases rejecting claims by third party payors seeking to recover sums paid for medicines that allegedly were promoted for off-label uses is Southeast Laborers Health & Welfare Fund v. Bayer Corp., Case No. 08-1928-MD-Middlebrooks/Johnson, slip op. (S.D. Fla.) (registration with Law 360 required to access link).  In Southeast Laborers, the trial court had given plaintiff two extra opportunities to plead a claim under RICO or the New Jersey Consumer Fraud Act. 

Plaintiffs alleged that Bayer promoted the $1,000-per-dose drug Trasylol for off-label use in controlling surgical bleeding despite its knowledge that there were cheaper, more effective medicines that presented less risks of kidney damage and other harms.  In the Second Amended Complaint, plaintiff alleged that it "paid enormous sums of money to Bayer that they would not have paid had they been aware that Trasylol was not safer, more efficacious or of greater value than available alternatives that were significantly cheaper," and it "would never have incurred this expense had Bayer been honest about the safety and efficacy of Trasylol."  Slip op. at 10.  

The court held that this failed to plead the necessary proximate causation under RICO because it was tantamount to a "fraud-on-the-market" theory that nearly every court to consider the question has rejected outside of the securities context.  Slip op. at 12.  As the court explained:

Although Plaintiff argues that it had an independent choice of whether or not to pay for Trasylol, it does not explain how/why it made the choice to pay for Trasylol and how/why Bayer's alleged concealment of the dangers of Trasylol led Plaintiff to pay for Trasylol.  Ultimately, Plaintiff has not established a different premise of proximate causation and still has not met the Holmes requirement that it demonstrate a direct relation between its payment for Trasylol and Bayer's alleged fraudulent concealment.

Id. at 13.  The court thus dismissed the RICO claim with prejudice.

For similar reasons, the court dismissed the New Jersey Consumer Fraud Act claim with prejudice, holding that plaintiff had failed to properly allege proximate causation.  Id. at 16 ("Plaintiff has not alleged a premise of proximate causation that is distinguishable from one that relies on a fraud-on-the-market analysis.").  Plaintiff argued that a fraud-on-the-market analysis applies only where a plaintiff argues that the price was inflated by the alleged misrepresentations.  But the court rejected this argument, saying that even where plaintiff alleges that it would not have paid any amount for the medicine and seeks a complete rescission of all sales, this, too, is a fraud-on-the-market analysis that has been rejected repeatedly.  Id.

Plaintiff had added to the Second Amended Complaint express and implied warranty theories.  The court dismissed the express warranty theory without prejudice for plaintiff's failure to identify any affirmation of fact, promise, or description of Trasylol that it had received that had become part of the basis of the bargain.   Id. at 18-19.  The court dismissed the implied warranty claim without prejudice because the complaint did not allege that Trasylol was unfit for the intended purpose of preventing perioperative bleeding.  Id. at 20.

The court dismissed plaintiff's common law fraud and negligent misrepresentation claims with prejudice for failure to identify any reasonable reliance and/or proximate causation.  Id. at 22.

And the court dismissed the unjust enrichment count because such claims generally are "not allowed to proceed where all of the plaintiff's other tort claims have failed because of the remoteness of a plaintiff's injuries from a defendant's wrongdoing.  Id. at 23.

Southeast Laborers joins a growing body of law that prevents remote parties from bringing suits for speculative harm allegedly arising out of hundreds or thousands of individual doctor-patient decisions.

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In Levinson v. Johnson & Johnson Consumer Cos., 2010 WL 421091 (D.N.J. Feb. 1, 2010), Judge Dennis Cavanaugh was confronted with yet another attempt to turn a product liability action into a consumer fraud class action by carefully pleading only economic harm and a failure to disclose the risk of harm.  Faced with motion to dismiss, Judge Cavanaugh significantly narrowed the class, but he allowed certain limited claims to go forward.

In Levinson, some Missouri plaintiffs brought a putative nationwide class action against J&J and Wal-mart, alleging that J&J's Baby Shampoo and Wal-mart's Equate Tearless Baby Wash contained trace amounts of chemicals that increase the risk of cancer, cause skin irritation, and can lead to asthma and hypersensitivity.  Plaintiffs allegedly had independent lab tests conducted that identified trace amounts of methylene chloride (which FDA has banned from use in cosmetics), 1,4-dioxane and formaldehyde.  Plaintiffs alleged that the defendants' failure to disclose the presence of these chemicals -- as well as statements such as "Ultra Mild," "Hypoallergenic," and "gentle enough even for newborns" -- constituted a violation of state consumer fraud statutes, a breach of the implied warranty of merchantability and implied warranties of fitness for a particular purpose, and unjust enrichment.

The defendants moved to dismiss for lack of standing and for failure to state a claim as a matter of law.  In analyzing their standing argument, the court relied heavily on Koronthaly v. L'Oreal, 2008 U.S. Dist. LEXIS 59024 (D.N.J. July 25, 2008), a case involving the purchase of lipstick containing lead.  Judge Cavanaugh described the holding in Koronthaly as "[i]n the absence of an FDA regulation concerning lead content in lipstick, or other legal prohibition, the plaintiff could not 'seek a remedy for a harm that she had not actually or allegedly suffered.'"  Levinson, 2010 WL 421091 at *4 (citation omitted).  Accordingly, the court held that plaintiffs lacked standing to assert purely economic harm from the chemicals that were unregulated by the FDA in soap or cosmetics (formaldehyde and 1,4-dioxane), but they could assert a claim for purely economic harm involving the substance that had been banned by the FDA for use in cosmetics (methylene chloride).  As the court explained:

While the Court agrees that the assertion of an economic injury is not an automatic bar to standing, Koronthaly demonstrates that an exception has been recognized in the context of claims concerning defective products, absent a specific legal prohibition precluding particular ingredients or usages.  Insofar as Plaintiffs' claims pertain to allegedly toxic chemicals that have not been banned by the FDA for use in cosmetics . . . this Court concludes that any potential injury is too remote, hypothetical and/or conjectural to establish standing in this matter.  However, insofar as Plaintiffs' claims pertain to methylene chloride, a chemical explicitly banned for use by the FDA in any cosmetic, this Court declines to dismiss Plaintiffs' claims pursuant to Fed.R.Civ.P. 12(b)(1) for lack of standing.

Id. at *4.

The court then proceeded to analyze whether the individual causes of action stated a claim under Rule 12(b)(6).  The parties apparently had represented to the court that regardless of whether New Jersey law or Missouri law were applied, the result would be the same, and thus there was no conflict of laws issue.  Id. at *5.  The court disagreed, holding that New Jersey's Product Liability Act preempted plaintiffs' other claims.  The court relied upon Sinclair v. Merck & Co., 948 A.2d 587 (N.J. 2008), in which the New Jersey Supreme Court held that consumer fraud claims for economic harm allegedly caused by prescriptions for Vioxx were preempted by the Product Liability Act.  Judge Cavanaugh concluded:

Similarly, at the heart of this matter is the potential for harm caused by the defective products, J&J Baby Shampoo and Wal-Mart Equate Tearless Baby Wash, containing allegedly "toxic chemicals linked to increased cancer risk, adverse skin reactions, and other serious health problems." (See Pl. Compl. para. 2). . . .  [C]onsistent with the Sinclair decision, this court concludes that the PLA subsumes all of Plaintiffs' claims, effectively precluding Plaintiffs' claims with respect to the CFA, and otherwise, in the absence of "harm" as defined by the PLA.  The Court does not agree that articulating a claim in terms of pure economic harm where the core issue is the potential injury arising as a consequence of the products' allegedly harmful chemicals converts the underlying defective product claim into an independent and unrelated consumer fraud issue.  Limiting a claim to economic injury and the remedy sought to economic loss cannot be used to obviate the PLA.

Id. at *6. 

Accordingly, because New Jersey's Product Liability Act would preempt all claims, but Missouri's would not, the court concluded there was a conflict of laws requiring it to determine which law would apply.  Because the plaintiffs were from Missouri and bought and used the product there, the court concluded that Missouri law would apply to these plaintiffs' claims.

Missouri's Consumer Fraud Act requires a causal connection between the allegedly unfair practice and the plaintiff's harm.  Where the harm allegedly results from a failure to disclose, "'there must be a showing that the [product] in fact suffered that defect, or evidence from which the defect reasonably could be inferred, in order to demonstrate an ascertainable loss as a result of [defendant]'s failure to disclose the defect.'"  Id. at *7 (citation omitted).  The court concluded that as to methylene chloride, which the FDA had banned for use in cosmetics, plaintiffs had sufficiently pled a Consumer Fraud Act claim.

Similarly, the court concluded that, with respect to methylene chloride, plaintiffs had sufficiently pled claims for breach of implied warranties under Missouri law.  Id. at *9.

However, the court held that plaintiffs had failed to plead a cause of action for unjust enrichment under Missouri law because they had not sufficiently pled that there was irreparable injury or the lack of an adequate remedy at law.  Id.  The loss was economic, and could be remedied by the payment of money, which could be recovered by an action at law.  Thus, there could be no unjust enrichment.

For those keeping a tally, the court whittled the Missouri plaintiffs' claims down to the violation of Missouri's Consumer Fraud Act and breach of implied warranties solely for the inclusion of methylene chloride -- not the other substances.  In concluding that New Jersey law would preclude all claims because of its Product Liability Act, the court also went a long way toward establishing why a nationwide class could not be certified.  It remains to be seen where this action will go from here, but we will attempt to monitor it for you.

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New Yorkers always warn: "Don't buy a dog at a pet store!  They all come from puppy mills, are sick, and were raised in deplorable conditions."

But I bought my dog at a mall pet store.  I wasn't shopping for a dog nearly two years ago when Ted came into my life.  But decisions have consequences, and the decision to kill time at a pet store while waiting for friends to arrive for dinner at a nearby restaurant resulted in me sharing my apartment with Mr. Ted E. Bear.

I didn't know much about where he came from.  His papers said a farm in Missouri, my home state.

And frankly, I didn't care.  Although I sincerely hoped he had not come from a puppy mill, he had a very chill personality and I could tell we would get along well together.  If he had the croup and I had to pay for a vet visit, so be it.  (Thankfully, he didn't.)

Given this experience, I read Martinelli v. Petland, Inc., 2010 WL 376921 (D. Ariz. Jan. 26, 2010) with great interest.  In Martinelli, 32 plaintiffs brought a class action against Petland, alleging that they defrauded consumers by selling sick dogs that were raised in puppy mills while representing to the public that the puppies were "healthy," "the finest available," bred by "professional and hobby breeders who have years of experience in raising quality family pets," and "bred under safe and humane conditions by a reputable breeder with proper canine husbandry practices."  Plaintiffs plead causes of action under RICO, state consumer protection statutes, and unjust enrichment.

The court in Martinelli dismissed all but two plaintiffs' RICO and consumer protection claims for failure to adequately plead causation.  The complaint was chock full of allegedly fraudulent statements made by Petland and the breeder, The Hunte Corporation, on websites and in written materials.  Conspicuously absent from the complaint, however, were allegations saying that these statements caused them to make their purchase.  The court noted that "not a single Plaintiff has alleged that he or she ever visited Defendants' websites, received Defendants' written brochures, or relied on a written health certificate or warranty."  Id. at *3.

The court held that "absent some allegation of reliance, Plaintiffs have not pled a 'direct and proximate causal relationship' between Plaintiffs' injuries and [the] purported fraudulent scheme."  Id.  The plaintiffs argued that causation should be inferred as a matter of common sense, as no one would want to purchase defective goods.  But the court noted that even if plaintiffs had received the alleged misrepresentations, the court could not presume that they were material to the plaintiffs' decisions to purchase the animals:

[T]here is no single, common-sense reason for a puppy purchase.  A person might buy a puppy because he falls in love with it in the store window, he has heard it will make a good guard dog, he likes the price, he is referred to the store by a friend, or he finds the store convenient.  It is not necessarily true that every purchaser would base his or her decision on the fact that the puppy was "the finest available" or was bred by professional, hobby, or USDA-approved breeders -- key misrepresentations identified in the amended complaint.

In making their common-sense causation argument, Plaintiffs focus exclusively on the health of the puppies, asserting that "it is illogical that Plaintiffs would purchase their sickly or dying puppy mill puppy absent a misrepresentation as to its health. . . . A person who falls in love with a puppy in the store window might well purchase the puppy in the absence of any representation concerning its health.  However unwise, some people may even buy a sick puppy in order to provide it a good home and nurse it back to health.  It simply cannot be said that a representation concerning the puppy's health is obviously relied on in the same way that a consumer looking for car wax relies on the product's label as "car wax" or in the same way that a person paying for a tax service relies on the assumption that the service will be available.  Plaintiffs conspicuously have failed to allege that they relied on representations concerning the puppies' health, and the Court cannot assume that such representations were the reason Plaintiffs purchased the puppies.

Id. at *4 (citations omitted).

The court dismissed the RICO claims of all plaintiffs except two -- Plaintiffs Moskow and Galatis -- who alleged reliance upon oral representations made by Petland (but not the breeder, Hunte).  Plaintiff Galatis allegedly was specifically reassured by a Petland employee that the puppy was healthy and "(1) it had never been sick, (2) was up to date on his shots, (3) was not hypoglycemic, and (4) was lethargic and quiet only because he was stuck in a cage all day long."  Id. at *5.  Plaintiff Moskow asked whether his puppy was from a puppy mill and he was assured that it was not.  The court held that these oral representations were part of the scheme alleged in the complaint, and it inferred that plaintiffs had relied upon them in making their purchase.  Thus, the RICO claim survived for Plaintiffs Moskow and Galatis.

The court applied the same analysis to the Rule 9(b) challenge to the complaint and to the state consumer protection act claims.  The generic allegations of the vast majority of the plaintiffs failed to sufficiently plead causation:

Plaintiffs assert that reliance is not an element of many state consumer protection claims.  But plaintiffs do not dispute that causation is an essential element.  Indeed, "whether it be termed an issue of reliance or an issue of proximate cause, an appropriate rule is that where the defendant is alleged to have made material misrepresentations or misstatements, there must be a cause and effect relationship between the defendant's acts and the plaintiff's injuries.  Thus, regardless of whether reliance is a required element under state consumer protection statutes, Plaintiffs "must at least allege that they were exposed to the offensive conduct."  Plaintiffs other than Moskow and Galatis have made no such allegation.

Id. at *9 (citations omitted).

The court thus dismissed the state consumer protection claims except for Plaintiff Moskow's claim under the Maine consumer protection act.  (Plaintiff Galatis was from Massachusetts, but the Massachusetts act had not been pled in the amended complaint.)  It also dismissed the unjust enrichment claims for all plaintiffs except Moskow and Galatis; because the two had adequately pled a fraud-based claim, the unjust enrichment claim could stand, the court held.

Finally, the court rejected the defendant's assertion of the economic loss doctrine as a defense to the claims.  Petland argued that because plaintiffs allegedly received damaged goods, they therefore were asserting typical warranty claims that give rise to purely economic loss.  The court disagreed, observing that plaintiffs were seeking damages for being fraudulently induced into entering into the sales contract.

Martinelli is an interesting decision because it parses through the possible motivations underlying the purchase decision and holds that, after already having been given one chance to amend the complaint, a plaintiff cannot plead consumer fraud or RICO without pleading a causal connection between the allegedly fraudulent statements and the reason he made the purchase.  Because this is an essential element of each class member's claim, it seems clear that individual issues would predominate a trial, making class certification unlikely. 

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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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A Pennsylvania intermediate appellate court yesterday affirmed a trial court's decertification of a statewide class action alleging plaintiffs had suffered economic harm from taking Neurontin for uses not approved by the FDA.  See Clark v. Pfizer Inc., No. 754 EDA 2009, 2010 Pa. Super. 6, Slip op. (Pa. Super. Jan. 19, 2010).  In doing so, the court rejected a "fraud on the market" theory and so-called "statistical proof" of causation.  Because my Skadden colleagues worked on the appeal, I'll only briefly summarize its holdings here.

Plaintiffs often cite to Pennsylvania precedents that encourage early and liberal certification of class actions.  But the corollary to such a liberal certification rule, of course, is that where discovery presents evidence that the case cannot be manageably tried as a class, the trial court retains the discretion to decertify the class.  That is what happened in Clark:  the trial court originally had certified a class of Pennsylvania residents, but after discovery and upon the evidence, the court then decertified the class.  It also found that people who benefitted from taking Neurontin could not state a claim, and so it had granted summary judgment as to those class members who had benefitted from taking the medicine.  And it granted summary judgment on the express warranty claim because there was no proof that plaintiffs had received any warranties.

Plaintiffs complained that the trial court -- by granting summary judgment and then decertifying the class -- had put them in an impossible position where absent class members arguably were bound by substantive judgments on their claims, but could not appeal them because there was no proper class.  Under the circumstances, the Superior Court effectively agreed and reversed the trial court's two grants of summary judgment.  Slip op. at 24-25.

But the Superior Court affirmed the trial court's decertification of the class.  The trial court had decertified the class because there were individual questions for each class member as to whether he or she had benefitted from taking Neurontin.  Although the Superior Court acknowledged that this was true, it stressed that the real reason the class could not be certified was that the proposed class failed the typicality, commonality and predominance requirements of the class action rule.  Why?  Because causation (i.e. reliance by each class member's doctor upon a misrepresentation) could not be presumed:

Where there exists various intervening and possibly superseding causes of the damage, liability cannot be determined on a class-wide basis because individual issues would predominate issues of fact and law that are common to the class and the representatives of the class.

Slip op. at 10 (citation omitted).

Plaintiffs' expert had relied on statistical modeling to opine that virtually all of the class members' doctors had relied on the defendants' alleged misrepresentations to prescribe Neurontin for uses not approved by the FDA.  But as a result of discovery, defendants had introduced testimony from Pennsylvania doctors establishing that their prescriptions were based on other factors, not any so-called "misrepresentations."  Citing to the decision in the federal MDL -- In re Neurontin Marketing, Sales Practices & Products Liability Litigation, 257 F.R.D. 315 (D. Mass. 2009) -- the Superior Court rejected any "presumption of causation" or "fraud-on-the-market theory" (slip op. at 11), holding instead that each class member must establish reliance/causation on his or her own to establish a right to recover (id. at 15).  As the court put it:

In sum, statistical probability does not substitute for actual inquiry, as a general showing of percentages does not tend to prove that the class members' specific doctors relied upon Defendants' statements or that Defendants' statements were the proximate cause of an injury.

Slip op. at 16.

Because the issue of causation was an individual question for each class member, the case could not be tried as a class action.

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I have written previously about the proliferation of suits brought by "third party payors" (or "TPPs") -- such as insurers and union health benefit funds -- that appear like ants at a picnic whenever a medicine is recalled, a new warning is mandated, or a pharmaceutical company is accused of marketing a medicine for "off label uses" that have not been approved by the FDA.  Often such claims are dismissed at the pleading stage because it is so difficult to connect any alleged misrepresentation made by a pharmaceutical company to a prescribing doctor's decision to prescribe the medicine. 

A recent decision in the Neurontin MDL makes it plain that even where such claims are allowed to progress past the pleading stage, it is next to impossible for most TPPs to actually prove causation.  See In re Neurontin Marketing and Sales Practices Litig., 2010 WL 53568 (D. Mass. Jan. 8, 2010).  In light of the fact that lawyers from my firm are involved in the case, I'll keep the editorializing to a minimum.

In the Neurontin case, defendants moved for summary judgment against 3 TPPs.  Two of them had not implemented special restrictions on prescribing Neurontin until at the earliest 2004, and they did not allege reliance on any particular statements by the defendant.  The court granted summary judgment as to these TPPs.

First, the court noted that "trial courts have almost uniformly held that in a misrepresentation action involving fraudulent marketing of direct claims to doctors, a plaintiff TPP or class must prove through individualized evidence that the misrepresentation caused specific physicians, TPPs, or consumers to rely on the fraud, and cannot rely on aggregate or statistical proof."  Id. at *9 (citing 4 cases).  The court observed that "[t]he Second Circuit has reached a similar conclusion, despite evidence of widespread fraudulent marketing of cigarettes to consumers, stating that 'not every wrong can have a legal remedy . . . at least not without causing collateral damage to the fabric of our laws.'"  Id. (quoting McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 219 (2d Cir. 2008)).

Tellingly, the court observed that although it had presided over Neurontin-related litigation for more than 10 years, "no evidence has been presented of any doctor who states that she relied on a misrepresentation or omission in prescribing Neurontin for an off-label indication."  Id. at *10.

The court held that because the 2 TPPs "cannot prove which doctor's prescriptions were caused by Defendants' alleged fraudulent misrepresentations or omissions and which were not," summary judgment on causation was appropriate.  Id.  "Plaintiffs must provide a damages model that segregates damages caused by unlawful conduct from damages caused by lawful conduct."  The court held that the TPPs' reliance upon an expert opinion employing an aggregate damages model was insufficient as a matter of law.

(A third TPP's claims survived summary judgment, but that TPP was unusual in that it had alleged direct interactions between the defendant and the TPP's decisionmakers regarding its formulary.  Id. at *2.) 

The decision in Neurontin is another strong link in a long chain of decisions rejecting so-called "aggregate" methods of proof of causation and reliance in third party payor cases.   

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Plaintiffs in consumer fraud class actions often argue that pleading fraud on the market is sufficient to establish a classwide claim for violation of a state consumer fraud act.  But the Illinois Supreme Court recently reiterated that Illinois' Consumer Fraud Act requires individual proof of deception and causation.  In DeBouse v. Bayer Ag, 2009 WL 4843362 (Ill. Dec. 17, 2009), plaintiff had sued Bayer in a class action for economic harm allegedly caused by the cholesterol-lowering medicine, Baycol, which was withdrawn from the market in August 2001 after its use was associated with a serious muscle condition.  

Bayer had moved for summary judgment, arguing that plaintiff could not establish actual deception and that that deception caused plaintiff's harm, as required under the statute.  Plaintiff countered that where the defendant is alleged to have concealed a serious product risk from the medical community and the public at large, individual proof of deception was not required under ICFA.  Plaintiff did not suffer personal injuries from taking Baycol, but alleged that the price she paid was inflated because Bayer had not disclosed the risk of the serious muscle condition.  The plaintiff had testified that she saw no Baycol advertising and knew nothing about the medicine prior to her doctor prescribing it for her. 

The trial court refused to grant summary judgment for the defendant, but certified three questions for interlocutory appeal.

Question 1:  Whether an Illinois consumer who purchases a pharmaceutical product, later withdrawn from the market because it was deemed unsafe, can maintain an action under the Illinois Consumer Fraud Act, even though the pharmaceutical company did not engage in direct communication or advertising to the consumer.

The Illinois Supreme Court answered this question in the negative.  Reviewing a long line of cases interpreting ICFA, the court observed:

The basic principle in each of the foregoing cases is that to maintain an action under the Act, the plaintiff must actually be deceived by a statement or omission that is made by the defendant. . . .

. . . [W]e have consistently rejected the market theory of causation. . . .  [W]e have repeatedly emphasized that in a consumer fraud action, the plaintiff must actually be deceived by a statement or omission.  If there has been no communication with the plaintiff, there have been no statements and no omissions.  In such a situation, a plaintiff cannot prove proximate cause.  We therefore answer the first certified question in the negative.  A consumer cannot maintain an action under the Illinois Consumer Fraud Act when the plaintiff does not receive, directly or indirectly, communication or advertising from the defendant.

Id. at *5.

Question 2:  Whether the Defendant's offering for sale a product in Illinois is a representation to prospective customers that the product is reasonably safe for its intended purpose such that proof of a defendant's failure to disclose safety risks associated with the product to consumers is a violation of the Illinois Consumer Fraud Act.

The Illinois Supreme Court recognized that the answer to the question might depend on the nature of the product being sold.  Accordingly, it limited its response to pharmaceutical products.  The court noted that it had adopted Section 402A of the Restatement (Second) of Torts and comment k, which recognizes that prescription drugs are unavoidably unsafe products:

The Restatement approach reflects the reality that even in their intended and ordinary use, prescription drugs may nonetheless cause harmful side effects in some patients.  A drug manufacturer cannot say with complete certainty that its product, when used as intended, will be reasonably safe for all patients.  As a result, the mere sale of a prescription medication cannot be a representation which serves as the basis for a consumer fraud claim.  Consequently, we answer the second certified question in the negative.

Id. at *7.

Question 3:  Whether fraudulent statements or omissions made by a defendant to third parties, other than the consumer, with the intent that they (1) reach the plaintiff and (2) influence the plaintiff's action and (3) plaintiff relies upon the statements to his detriment, can support an action under the Illinois Consumer Fraud Act.

The Illinois Supreme Court answered this question in the affirmative; misrepresentations that indirectly reach the plaintiff and are relied upon can support an ICFA action.  But the court, reviewing prior decisions, held that this did not mean that a "fraud on the market" theory would support an ICFA claim.  Rather, a plaintiff must establish who received the misrepresentations, that they reached the plaintiff or were acted upon, and that they caused plaintiff's damages:

In this case, DeBouse similarly fails to allege that her particular doctor was actually deceived by any of Bayer's advertisements or statements.  What she does allege is the general deception of 'consumers, the medical community, the health care insurance industry, and the public.' . . .  DeBouse alleges the deception of unspecified persons having no demonstrated connection to her.  As such, DeBouse's claim is likewise based on the market theory that this court has consistently rejected.  Therefore, we hold that the circuit court erred in denying Bayer's motion for summary judgment.

Id. at *8.

The decision in DeBouse is an important example of courts enforcing the reliance and causation elements of state consumer fraud statutes to ensure that only those who actually were deceived and injured by a defendant's representations may recover damages.

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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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In a previous post I had sounded the alarm about Yokoyama v. Midland National Life Insurance Co., 2009 WL 2634770 (9th Cir. Aug. 28, 2009), in which the Ninth Circuit had misread Hawaii's Deceptive Practices Act to reverse the trial court's denial of class certification, holding that neither the class representative nor the class was required under the statute to establish causation in order to recover damages.  Instead, the Ninth Circuit opined, they need only prove a "tendency to deceive" under a so-called "objective" standard.

If that were, in fact, true, it would make Hawaii's Deceptive Practices Act the most liberal consumer fraud act in the country.  But it is not.

This week I published an article in the Federalist Society's periodical Class Action Watch which explains the fundamental flaw in the Yokoyama opinion:  it focuses only on the part of the DPA that defines deceptive conduct, and wholly ignores the private right of action provision that authorizes individuals to sue for damages caused by that deceptive conduct.  It is this latter provision that requires causation for every claimant (both class representative and absent class member) by creating a private right of action for "any consumer who is injured by an unfair or deceptive act or practice forbidden or declared unlawful by" the statutory section the Ninth Circuit relied upon.  Haw. Rev. Stat. sec. 480-13(b) (emphasis added).  As my article explains, the Ninth Circuit previously had addressed the interplay between these two statutory provisions, recognizing that mere deceptive conduct -- without damages caused by such conduct -- was not enough to state a claim under Hawaii's DPA.  Now, the Yokoyama decision -- which wholly fails to address this prior Ninth Circuit precedent -- sits in the casebooks like a proverbial siren, beckoning lawyers and jurists off course from established Hawaii law at their peril.

I was disappointed that no petition for rehearing en banc appears to have been filed, suggesting that this fundamentally flawed precedent is one we will have to live with for years to come.

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Recently I spoke with Keith Loira at Public Nuisance Wire about the Fifth Circuit's recent decision in Comer v. Murphy Oil, which I previously posted about here. 

You can read Keith's interview of me here.

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Judge Saundra Brown Armstrong's opinion in Native Village of Kivalina v. ExxonMobil Corp., Case No. C 08-1138 SBA, Slip op. (Sept. 30, 2009) is a strong retort to the Second Circuit's recent opinion in Connecticut v. American Elect. Power Co., 2009 WL 2996729 (2d Cir. Sept. 21, 2009).  In Kivalina, Judge Armstrong was faced with a public nuisance suit for damages estimated to run between $95 million and $400 million.  She held that the court lacked subject matter jurisdiction under the political question doctrine, and that plaintiffs lacked Article III standing because their injuries were not fairly traceable to the defendants' alleged misconduct.  In these respects, her conclusions were squarely against those of the Second Circuit in AEP.

Judge Armstrong proceeded from the standard presumption against federal jurisdiction, placing the burden on plaintiffs, as the proponents of federal jurisdiction, to establish their right to be in federal court.  The court also refused to apply a lower standard to plaintiffs as governmental entities because theirs was a lawsuit for damages, not merely a suit to enforce a regulatory scheme.

Judge Armstrong agreed with the Second Circuit that the issue of global warming -- which implicates international relations through things like the Kyoto Protocol -- did not present an issue of foreign policy that was textually committed to another branch of government.    Slip op. at 8-9. 

But she parted company with the Second Circuit on the issue of whether the case was justiciable using judicially discoverable and manageable standards.  Judge Armstrong observed that the tort of public nuisance requires the jury to determine whether there was an "unreasonable" interference with a right common to the public.  That determination involves comparing the social utility of the defendant's conduct with the gravity of the harm it inflicts.  Judge Armstrong makes a strong case that this determination is not one that can be guided by rational, principled legal rules:

[T]he factfinder will have to weigh, inter alia, the energy-producing alternatives that were available in the past and consider their respective impact on far ranging issues such as their reliability as an energy source, safety considerations and the impact of the different alternatives on consumers and business at every level.  The factfinder would then have to weigh the benefits derived from those choices against the risk that increasing greenhouse gases would in turn increase the risk of causing flooding along the coast of a remote Alaskan locale.  Plaintiffs ignore this aspect of their claim and otherwise fail to articulate any particular judicially discoverable and manageable standards that would guide a factfinder in rendering a decision that is principled, rational, and based upon reasoned distinctions.

Id. at 12 (citations omitted).

Judge Armstrong acknowledged that the Second Circuit expressed faith in the judiciary's ability to handle "new and complex problems" of environmental law, but she herself was "not so sanguine."  Judge Armstrong pointed out that the Second Circuit's authorities were distinguishable because they "involved a discrete number of 'polluters' that were identified as causing a specific injury to a specific area."  Id.  But the Kivalina plaintiffs presented a far different case -- one where everyone in the world shared some responsibility, but only a handful of defendants were named, and where the harm at issue allegedly derived from emissions that occurred over more than a hundred years.  Judge Armstrong noted that the causal chain in the Second Circuit's environmental cases was much tighter than the one pled by plaintiffs:

In a water pollution case, the discharge in excess of the amount permitted is presumed harmful.  In contrast, the harm from global warming involves a series of events disconnected from the discharge itself.  In a global warming scenario, emitted greenhouse gases combine with other gases in the atmosphere which in turn results in the planet retaining heat, which in turn causes the ice caps to melt and the oceans to rise, which in turn causes the Arctic sea ice to melt, which in turn allegedly renders Kivalina vulnerable to erosion and deterioration resulting from winter storms.

Id. at 13 (citations omitted).  Because of the uniqueness of plaintiffs' theory, the prior case law would not equip a court to determine the claims in a reasoned manner, Judge Armstrong concluded.

Judge Armstrong also took issue with the conclusion that plaintiffs' global warming claims did not impermissibly ask the judiciary to make policy choices better left to the representative branches.  As she observed, deciding plaintiffs' public nuisance claim would require the court to determine what emission limits should have been imposed in the past, and to make the fundamental policy choice of who should bear the costs of global warming.  Particularly where plaintiffs admit that nearly everyone on Earth bears some responsibility, but they have sued only a limited number of defendants from arbitrarily chosen industries -- including none from the transportation industry -- the court could properly conclude that the policy choice of allocating responsibility for global warming should be made by the legislative or executive branch in the first place.

Because plaintiffs' claims lacked judicially manageable standards and required the court to make policy choices better left to political branches of government, Judge Armstrong held that the political question doctrine applied.

Judge Armstrong also found that plaintiffs lacked standing because their injuries were not fairly traceable to defendants' conduct.  Once again, the court analogized to earlier Clean Water Act cases.  Those cases had involved presumptively-harmful discharges above a permit level into a readily identifiable waterway.  In Kivalina, however, there were no federal standards on the release of greenhouse gases, and thus no presumptive causation could apply.  Moreover, the release was not traceable, but rather diffused into the atmosphere and combined with gases released from countless other sources over centuries.  Judge Armstrong analogized to water pollution cases discussing the concept of the "zone of discharge," which hold that where the plaintiff lives too far downstream, he is not within the zone that would make his injury fairly traceable to the defendant's release of effluent.  She concluded that, given the lack of traceability and the tenuous chain of causation pled, plaintiffs lacked standing to sue because their injuries were not fairly traceable to the defendants' conduct.

The Kivalina opinion is a well-written critique of federal jurisdiction over global warming claims.  One can expect that it will be heavily cited in petitions for rehearing en banc in AEP and Comer v. Murphy Oil Co., 2009 WL 3321493 (Oct. 16, 2009), which I posted yesterday.

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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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One of the more interesting developments in the rise of consumer fraud class actions has been the involvement of third party payors (or "TPPs") -- such as union health benefit plans -- as plaintiffs in these cases. These TPPs pay for medicines prescribed for individual members of these health benefit plans; the TPPs maintain a list or "formulary" of approved medicines for which they will pay, and they often contract with a pharmacy benefit manager to manage the formulary and approve claims.

These health and welfare benefit organizations often have a relationship with a plaintiffs' law firm from having made claims in securities class actions.  But consumer fraud cases are far, far different from securities fraud cases because they do not presume reliance; rather, it has to be pled and proven.  And that's where these TPPs often have a problem, because they typically are unwilling to go through their own voluminous documents to establish reliance on an individual doctor-by-doctor basis, and the underlying transactions are covered by privacy laws.  Accordingly, the name of the game for TPPs is to keep the pleadings as generic as possible, so as to avoid these issues and try to skirt by the obvious predominance and superiority problems that they raise.

Yesterday -- in a decision won by my partner, Mark Cheffo -- Judge Kimba Wood dismissed a putative class action of TPPs brought against Pfizer because they failed to plead the necessary reliance.  See Southern Illinois Laborers' and Employers Health and Welfare Fund v. Pfizer Inc., Civ. A. No. 08 CV 5175 (KMW), Slip Op. (S.D.N.Y. Sept. 30, 2009).  In Southern Illinois Laborers, the plaintiffs were eleven health and welfare funds that sought to represent a nationwide class of TPPs that had paid for Lipitor, Pfizer's blockbuster cholesterol-lowering medication.  They asserted causes of action under RICO, state consumer protection statutes, and common law unjust enrichment, negligent misrepresentation, and civil conspiracy.  Plaintiffs alleged that Pfizer (1) misrepresented certain guidelines promulgated by an expert panel regarding who would benefit from lowering low-density lipoprotein (LDL cholesterol) levels, (2) failed to disclose and fraudulently minimized to physicians Lipitor's side effects, (3) misled physicians and pharmacy benefit managers about what patient groups would benefit from taking Lipitor.  They also alleged that Lipitor cost more than other statin medicines, and that they would not have paid a premium for Lipitor but for their reliance on a statement on the defendant's website that said it was lawfully advertising Lipitor.

Applying the strict pleading standard of Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), Judge Wood held that "that Plaintiffs have not adequately alleged causation, and, thus, they lack standing to bring any of their claims against Defendant."  Slip op. at 8.  She did, however, grant Plaintiffs leave to amend most of their claims.

In analyzing the RICO claim, Judge Wood noted that standing requires three elements:  (1) a RICO violation, (2) an injury to the plaintiff's business or property, and (3) a causal relationship connecting the RICO violation to the plaintiff's injury.  She focused on the causation element, which requires that plaintiff plead both a "but for" cause and a "proximate" cause.  Proximate cause, she observed, demands "'some direct relation between the injury asserted and the injurious conduct alleged.'"  Slip op. at 13 (citation omitted).

Plaintiffs advanced three different theories of causation, but the court held that each of them failed.  The first theory -- that physicians' reliance upon Pfizer's alleged misrepresentations about the safety and efficacy of its medicine caused the TPPs' injury -- failed because:

Plaintiffs do not explicitly allege that physicians in fact relied on Defendant's misrepresentations.

     Plaintiffs do not cite a single instance in which a physician received the fraudulent information and decided to prescribe Lipitor based on the information she received.  Plaintiffs do not even explicitly allege the more general claim that physicians in general relied on Defendant's misrepresentations.

Slip op. at 16.

The second causation theory floated by Plaintiffs was that pharmacy benefit managers relied on the Defendant's alleged misrepresentations, which caused the TPPs' injuries.  But again, the court looked to the Complaint to see that it did not alleged that the pharmacy benefit managers in fact relied on misrepresentations "regarding the cost effectiveness, efficacy, or safety of Lipitor when [they] decided to include Lipitor on the recommended formularies.  In addition, Plaintiffs do not specifically allege that Plaintiffs used formularies that were developed by [pharmacy benefit managers]."  Slip op. at 17.

The court gave short shrift to Plaintiffs' third causation theory that their injuries were caused by their reliance on the Defendant's statement on its website that it was marketing Lipitor lawfully.  The website statement was not substantive information about Lipitor and could not have affected the TPPs' assessment of Lipitor's "value, efficacy, and safety."  Id. at 18.  And although the TPPs might have been able to give doctors information to counter the Defendant's representations if they had known it was not marketing to physicians lawfully, even that theory requires an underlying allegation that the doctors were relying on the Defendant's alleged misrepresentations, which the Complaint did not contain.  Judge Wood distinguished the case upon which the Plaintiffs relied -- Desiano v. Warner-Lambert Co., 326 F.3d 339 (2d Cir. 2003) -- because it involved an underlying misrepresentation to TPPs about the safety of a drug.  Here, however, the underlying misrepresentation arguably was "a single, very general misrepresentation on [a] website [that Defendant's] advertising campaign was lawful, when it was not."  Slip op. at 19.

As for the state law claims, the court held that plaintiffs lack Article III standing to bring the claims because they do not expressly allege causation.  Nevertheless, it gave plaintiffs leave to replead all except the following:

• Ohio Consumer Sales Practices Act -- because TPPs are not natural persons who can engage in consumer transactions under the Act.
• Texas Deceptive Trade Practices Act -- because TPPs are not consumers under the DTPA because they do not "use" the goods they buy.
• New Jersey Consumer Fraud Act -- because TPPs are not consumers under the CFA because they do not "use" the goods they buy.
• Illinois Negligent Misrepresentation -- because the economic loss doctrine precludes the TPPs' claims.
• Ohio Negligent Misrepresentation -- because the cause of action applies only to those in the business of supplying information, not tangible products.
• Indiana Negligent Misrepresentation -- because the cause of action is viable only in the context of an employer-employee relationship.

By the way, the post on this case over at Herrmann and Beck's Drug and Device Law Blog has a number of links to their excellent prior posts addressing the problems with third party payor class actions.  Be sure to check it out.

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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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