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

Small plate #3:  Retailer's Extended Warranty/Service Agreements

I'm tickled pink (pun intended) to report a decision out of the People's Republic of Minnesota that actually enforces the terms of a contract and uses them as a defense to an unfair competition claim.  Really.  See Baker v. Best Buy Stores, LP, 2012 WL 539196 (Minn. Ct. App. Feb. 21, 2012).

In Baker, plaintiff bought a TV that had a one-year manufacturer's warranty.  In addition, she bought Best Buy's four-year service contract.  The service contract provided that if the TV failed during the duration of the contract, Best Buy would either repair or, at its discretion, replace the TV.  In the next paragraph, it provided that "[o]ur obligations under this Plan will be fulfilled in their entirety if we replace your product."  Again, in the "Limits of Liability" paragraph, the contract provided that "[i]n the event . . . we replace the product, we shall have satisfied all obligations under the Plan."

Plaintiff's TV stopped working nearly two years after purchase.  Best Buy took the return and determined that it could not or should not be repaired, so Best Buy replaced the TV with a comparable model.  It also told plaintiff that the service contract did not cover this new TV, and encouraged her to buy a new four-year service contract, which she did.  Then, she sued, claiming that she originally had bought a TV with four years of service, and thus she should not be robbed of two years of service just because she returned the TV because it failed to work properly.

The court failed to credit plaintiff's argument and affirmed the trial court's decision in favor of Best Buy:

[A]ppellants purchased a television set and a service contract from Best Buy.  The set subsequently malfunctioned after the expiration of the manufacturer's warranty, and Best Buy replaced it pursuant to the terms of the contract.  Although the service contract was purchased for a four-year term, the plain language of the contract contains specific language limiting the length of the contract if certain events occur.  This unambiguous language provided that the service contract is fulfilled if the television is replaced.  The district court correctly concluded that appellants received the benefit of the bargain with Best Buy.

Slip op. at 3.  The court rejected plaintiff's argument that the contract was really one for insurance, rather than a service contract.  And it rejected the notion that the contract was unfair because it gave Best Buy sole discretion to terminate the contract by providing a new TV.  As the court observed, that was the exact bargain spelled out in the contract, and the plaintiff agreed to its terms by signing the contract.

Plaintiffs then argued that the service contract was fraudulent and deceptive under Minnesota's Consumer Fraud Act and its False Statements in Advertising Act.  The court rejected these claims as well, primarily for the reasons stated in its "breach of contract" section of the opinion, and because of plaintiff's failure to identify with particularity a single advertisement that she claimed was false and misleading.  Slip op. at 4-5.

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It has certainly taken me long enough to get around to posting about it, but the Ninth Circuit issued an opinion earlier this month that raises an important issue for those of us who defend consumer class actions:  what is a removable "class action" under the Class Action Fairness Act.

Now remember that CAFA was passed to end the procedural games that were being played by plaintiffs' counsel to keep cases in state court where they could "hometown" the defendants.  You know, things like fraudulently joining local defendants against whom they had no plausible cause of action, pleading myriad one-state classes, etc.  CAFA was supposed to fix the problem by making all of these actions removable to federal court, and it was to be liberally applied.

Well, now we have the issue of so-called parens patriae actions, which are brought by the state attorney general.  Such actions, the AGs assert, are "state" "enforcement" actions that are not removable to federal court. 

Well, frogs swim, and you can call a frog a fish, but that doesn't give him gills.  And calling these parens patriae actions "state actions" doesn't change their essential character.  They are brought on behalf of -- and assert the rights to recover of -- individual citizens, not the State.  They seek restitution, which is a compensatory remedy for the real party in interest -- which is not the State, but the absent group of individual consumers.  They require notice, opt-out rights, and court approval of any settlement.  These are class actions.  If it looks like a duck, walks like a duck and quacks like a duck, it's a duck.

The Ninth Circuit recently rejected this common-sense approach, holding that parens patriae actions brought by the AGs of California and Washington were not "class actions" under CAFA (and thus not removable) because they were not brought under the state equivalent of Rule 23 and provide fewer procedural protections for absent class members than Rule 23 does.  Washington v. Chimei Innolux Corp., 2011 WL 4543086 (9th Cir. Oct. 3, 2011).  In reaching this conclusion, the court followed the Fourth Circuit's recent similar holding in West Virginia ex rel. McGraw v. CVS Pharm., Inc., 646 F.3d 169 (4th Cir. 2011).

These hypertechnical readings of CAFA, if allowed to stand, have lighted the path for the enterprising class action lawyer to avoid federal court and subject out-of-state defendants to the same sort of hometown tactics that they could use before CAFA was passed.  Rather than going to the trouble of even having a representative plaintiff, simply get your friend the Attorney General to appoint your firm as special counsel for the State to prosecute a parens patriae suit that, although nominally is the State's, in reality belongs to the group of consumers and provides all of the coercive benefits of aggregation.

Let's hope that someday soon the Supreme Court accepts review of CVS, Chimei Innolux, or another similar suit in order to give CAFA the broad interpretation that Congress intended.

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Last year I posted about a fascinating opinion in which a district court held that the superiority requirement of Rule 23(b)(3) was not met where the defendant already had engaged in a voluntary recall program for a toy that had inadvertently presented serious health risks to children who ingested it.  The court had reasoned that the voluntary recall program was superior to class litigation that would do nothing except add transaction costs to the same relief.

This week Ted Frank alerted me to a Seventh Circuit decision affirming that denial of class certification, but for different reasons.  See In re Aqua Dots Prods. Liab. Litig., No. 10-3847 (7th Cir. Aug. 17, 2011).  First, it held that the district court was wrong about Rule 23(b)(3)'s superiority requirement; superiority only looks to whether the proposed class would be superior to other litigation options, not voluntary recall and refund campaigns.  Andrew Trask discusses this portion of the opinion more fully here.

But in inimitable Easterbrook style, the court observed that "[a]lthough the district court's rationale is mistaken, it does not follow that the court's decision is wrong."  Slip op. at 7.  Instead of hanging its hat on superiority, the district court should have relied on Rule 23(a)(4)'s adequacy of representation requirement because "[a] representative who proposes that high transaction costs (notice and attorneys' fees) be incurred at the class members' expense to obtain a refund that already is on offer is not adequately protecting the class members' interests."  Slip op. at 7.  Indeed, "[t]he principal effect of class certification . . . would be to induce the defendants to pay the class's lawyers enough to make them go away; effectual relief for consumers is unlikely."  Slip op. at 8.

The Seventh Circuit also had some important things to say about manageability.  To begin with, a nationwide class's claim for punitive damages would present thorny choice of law problems.  Moreover, the court held that providing notice to anonymous purchasers -- coupled with the problem of determining who used the toys without problems, making them ineligible for class membership -- would present "serious problems of management."  Id. at 8.  Similarly, trying to assign class members to various subclasses for purposes of state consumer protection statutes would be "very difficult." 

Once again, this case should serve as an encouragement to companies that want to voluntarily remedy a newly-discovered problem with their products.  Here, a well-publicized recall program that provided substitute products or refunds served to avert a class action altogether.

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

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

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

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

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

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

What would they get?

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

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

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

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

And what would they give up?

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

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

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

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

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

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

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

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

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

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

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

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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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Every once and a while you come across a class action in which a lawyer seems to have found a technical violation of a statute and made a federal case of it, even though no one has been injured.  Loreto v. Procter & Gamble Co., 2010 WL 347152 (S.D. Ohio Sept. 3, 2010) is one of those cases.

In Loreto the defendant loaded its NyQuil and DayQuil cold and flu products with 150% of the recommended daily allowance of Vitamin C, using an ad campaign with famous TV moms (Mrs. Cunningham from Happy Days, Shirley Partridge from the Partridge Family, and Mrs. Brady from the Brady Bunch) touting the fact that the products help "replenish" the Vitamin C that the body needs and may help blunt the effects of the cold or flu. 

The FDA, apparently, was not amused.  Long ago, it had convened an advisory committee and issued a monograph that "does not allow for the combination of vitamin C with any of the other active ingredients" in cold and flu products.  Id. at *4.  The committee had found some evidence that vitamin C might be effective in mitigating cold or flu symptoms, but there was no evidence to suggest effective dosing.  In response to the defendant's advertising campaign, the FDA sent a warning letter stating that the vitamin C-laden products "'do not comply with the final monograph for OTC Cough-Cold'" medicines and thus, the FDA did not recognize them as safe and effective.

That's all some plaintiffs' lawyers needed to file a putative nationwide class on behalf of all purchasers, alleging violation of every state's consumer protection statute, as well as unjust enrichment.  They alleged that class members would have bought other, cheaper products if they had known the facts set forth in the FDA Warning letter.

Judge Timothy Black dismissed the complaint with prejudice.  To begin with, he noted that the named plaintiffs were New Jersey residents.  Thus, he analyzed the state consumer protection statute claim solely under New Jersey's statute.  Id. at *5-*6.  In doing so, he considered the defendant's argument that the NJCPA claim was barred by 21 U.S.C. sec. 337(a), which has been interpreted to mean that there is no private cause of action to enforce the provisions of the Food, Drug, and Cosmetics Act.  The court explained that plaintiffs could not "'use other federal statutes or state unfair competition laws as a vehicle to bring a private cause of action that is based on violations of the FDCA,'" or, in other words, they could not assert a claim that would not exist if the FDCA did not exist.  Id. at *7 (citation omitted).

The court held that plaintiffs failed this standard, because the only facts they pled to establish that the NyQuil and DayQuil products were ineffective was the FDA's warning letter.  That letter, as the court noted, only said FDA didn't recognize the safety and effectiveness of the products.  In fact, there was no evidence that vitamin C counteracts or inhibits the other ingredients in the products, and there was even evidence to suggest that vitamin C itself may be effective -- even if FDA does not formally recognize it.  Most important, plaintiffs did not plead that the products didn't work for them.  Thus, plaintiffs' cause of action under the NJCPA really was just asserting a technical violation of the FDCA, not that the defendant's products failed to actually work.  As such, the claim was one to enforce the FDCA in violation of 21 U.S.C. sec. 337(a).  Id. at *9-*10.

The court also held that plaintiffs lacked any injury that would give them standing to bring an NJCPA claim or an unjust enrichment claim.  Importantly, the court observed that:

Ascertainable loss is insufficiently pled where a plaintiff simply contends that the price charged for the misrepresented product 'was higher than it should have been as a result of defendant's fraudulent marketing campaign.'

Id. at *11.  The court noted that the complaint had no factual allegations that the medicines were ineffective in relieving the symptoms of plaintiffs' colds or flu.  Accordingly, plaintiffs got what they bargained for:  cold and flu medicine.  Thus, the unjust enrichment claim had to be dismissed.  Id. at *12.  

The court concluded that its dismissal should be with prejudice because plaintiffs had been given three opportunities to plead injury, including one attempt at re-pleading after the defendant had first filed its motion to dismiss.  (One might wonder why plaintiffs would not have pled personal facts about their experience with the products.  Other than the fact that the products probably worked just fine, the answer is simple:   if personal facts about the effectiveness of the products are necessary, then class certification clearly would be inappropriate because such individual inquiries would fail the predominance requirement of Rule 23(b)(3).  Plaintiffs often avoid personalizing pleadings precisely to avoid creating problems for themselves at the class certification stage.)

Loreto is an excellent example of how the "no private right of enforcement" argument can be used to dismiss specious class actions alleging technical statutory violations, but no real harm.

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