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

My friends in the plaintiffs' bar are extraordinarily creative individuals.  I think this is great, as it makes my job much more interesting and has the added benefit of keeping me employed.  One of the creative trends that I have seen from my friends in the plaintiffs' bar in recent years is the attempt to alternatively plead damages claims as claims for injunctive relief.  Indeed, as it becomes obvious that a claim for breach of warranty or contract cannot be certified as a Rule 23(b)(3) class because of individual issues involving breach, one can expect to see an alternative "declaratory and injunctive relief" count in the complaint asking for a class to be certified under Rule 23(b)(2) for a classwide declaration that the contract has been breached and an injunction directing the defendant to perform what it purportedly is contractually obligated to do.

Plaintiffs do this, of course, because there is no "predominance" and "superiority" requirement explicitly written into Rule 23(b)(2).  But courts have seen through this ruse, holding that 23(b)(2) has an inherent "cohesiveness" requirement that serves the same function as predominance and superiority.  See, e.g., Compaq Computer Corporation v. LaPray, 135 S.W.3d 657 (Tex. 2004).

Of course the irony of plaintiffs' ruse is that it would allow a court that could not certify an opt-out class for damages to instead certify a mandatory class that would bind all class members.

The Seventh Circuit recently gave State Farm a Valentine, flatly rejecting the 23(b)(2) dodge and providing important guidance on why courts must not let a claim for damages be recast as one for equitable relief.  See Kartman v. State farm Mutual Auto. Ins. Co., 2011 WL 488879 (7th Cir. Feb. 14, 2011).  In Kartman, plaintiffs brought a putative class action of roughly 7,000 policyholders against State Farm for failing to adequately compensate them for hail damage to their homes.  The trial court refused to certify a Rule 23(b)(3) class, recognizing that individual issues predominated over any common ones.  But it certified a Rule 23(b)(2) class of "all State Farm policyholders who filed insurance claims for damage resulting from the April 2006 hailstorm and did not receive 'an entirely new roof.'"  Id. at *7.  The theory was that by inspecting roofs on an ad hoc basis, State Farm had somehow breached an obligation to apply a uniform and objective standard in assessing roof damage.

The Seventh Circuit flatly rejected plaintiffs' argument and the trial court's theory.  To begin with, the court recognized that this was merely a claim for damages -- nothing more.  The "injunctive relief" theory was merely a set up to a claim for damages; even if State Farm reevaluated everyone's roof according to a uniform standard, it would only be laying a foundation for some class members to argue that they had been undercompensated under their policies -- which is a claim for damages:

[C]ertification under Rule 23(b)(2) is permissible only when class plaintiffs seek 'final injunctive relief' that is 'appropriate respecting the class as a whole.'  Here, the requested injunction is neither 'appropriate' nor 'final.'  The relief is not appropriate for several reasons, not hte least of which is that the normal remedy for wrongful denial of insurance benefits is damages, not equitable relief.  Moreover, the injunction envisioned by plaintiffs would in no sense be a final remedy.  A class-wide roof reinspection would only lay the evidentiary foundation for subsequent individual determinations of liability and damages.

Id. at *1 (citation omitted).

The court admonished that:

This technique of recasting a straightforward claim for damages as a claim for damages and injunctive relief runs into trouble on some basic principles of common law -- most fundamentally that a claim of injury is not cognizable unless it results from the breach of a recognized legal duty owed to the plaintiff.  Simply put, State Farm has no independent duty -- whether sounding in contract or tort -- to use a particular method to evaluate hail damage claims. . . .  [T]he method it uses to adjust claims is not independently actionable.

Id. at *5 (citations omitted).

The court noted that the basic elements of an injunctive relief class could not be met here.  First, there was no irreparable injury -- plaintiffs could be fully compensated by money damages for any alleged underpayment of their insurance claims.  Id. at *7.  The court also noted that the injunctive relief, as described by the plaintiffs, would be impractical and overly burdensome on State Farm, and -- importantly -- would simply amount to shifting the burden to State Farm to prove the elements of the plaintiffs' claims.  Id. at *8-*9.

Notably, in deciding the class certification question, the court was unafraid to look to the merits of the claims.  Indeed, it even recognized that there could be no unjust enrichment claim as a matter of law because there was an underlying contract.  Id. at *6.

Kartman is a strong opinion recognizing that where damages will remedy the plaintiffs' claimed injury, one cannot plead around the claim's Rule 23(b)(3) problems by recasting the relief sought as equitable in nature. 

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

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

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

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

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

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

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

* * *

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

* * *

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

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

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

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

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

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

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

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

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

Slip op. at 5 (emphasis in original).

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

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

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

Slip op. at 7-8.

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

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

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

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

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

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

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

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

Id. at *9.

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

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

Id. at *14 (citations omitted).

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

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The Ninth Circuit’s recent decision in Yokoyama v. Midland National Life Insurance Company, 2009 WL 2634770 (9th Cir. Aug. 28, 2009) reflects a fundamental misunderstanding of consumer fraud class actions and – if left untouched by the full panel on rehearing – threatens to do great mischief not only to Hawaii law, but to the law of other jurisdictions as well.

In Yokoyama, three senior citizens sued on behalf of a putative class of Hawaii residents who bought indexed annuity products.  They alleged that the defendant failed to adequately disclose in its brochures the risks associated with such products, and they thus alleged violations of Hawaii’s Deceptive Practices Act, Haw. Rev. Stat. sec. 480-2.

The district court had refused to certify the class, determining that Rule 23(b)(3) applied because the request for money damages predominated, and holding that the proposed class failed that rule’s predominance requirement because each class member would have to establish that he or she was actually misled and damaged thereby, as well as the amount of his or her damages.  See Yokoyama v. Midland Nat’l Life Ins. Co., 243 F.R.D. 400 (D. Haw. 2007).

In reversing the district court, the Ninth Circuit articulated – allegedly for the first time – that its standard of review when reviewing a trial court’s conclusion on an issue of law in the class certification context is de novo review.  Then, it held that the trial court erred because under Hawaii’s DPA, the class members did not have to prove that they relied on any deceptive statement, but only that the statement had a “tendency to deceive.”  Moreover, the court held that there was no need to inquire into what the brokers orally communicated to the senior citizens; the sole issue was whether the brochures “were capable of misleading a reasonable consumer.”  Finally, the court held that the need to calculate damages for each class members could not defeat class certification.

The sweeping effect of the Yokoyama Court’s re-write of Hawaii law is truly stunning:  apparently no class member – not even the named plaintiff – has to establish that he or she relied on a misrepresentation or that it in any way caused his or her injury in order to bring a damages claim under Hawaii’s DPA.  Not even the California has gone so far, divorcing the alleged misrepresentation entirely from any notion of reliance or causation for damages claims.  Notably, the Yokoyama Court reached this conclusion by citing two Hawaii Supreme Court decisions that were wholly inapposite on these issues.

The Yokoyama Court seemed to have no concept for how these products were actually sold.  As the district court had explained, the annuities were sold by independent brokers with different backgrounds and levels of training.  They gave different oral presentations and created on their laptops unique written materials for their customers based on the information the customers provided.  These interactions resulted in the customers’ different choices about which annuities to buy, what index or crediting method to select to achieve the best tax benefits, and how much to invest.

The bottom line is that – as part of these oral interactions – some portion of the putative class members were actually advised of the risks that may not have been mentioned in the brochures, and others were actually benefited and achieved their financial goals:

“Because some independent brokers did disclose, discuss, clarify, or explain the relevant provisions to individual consumers – even putting ‘worst case scenarios’ into writing – an individual inquiry is required to determine the impact of the oral presentation upon each investor, the behavior of the independent broker, and the nature of the relationship between each individual annuitant and his or her independent broker.”

243 F.R.D. at 408-09.

The Yokoyama Court’s opinion would allow people who were not deceived and who were not damaged to recover damages.  This is not only unfair; it makes absolutely no sense.  It also contradicts the express language of Hawaii’s statute:

“Any consumer who is injured by an unfair or deceptive act or practice forbidden or declared unlawful by section 480-2:  (1) May sue for damages sustained by the consumer . . .”

Haw. Rev. Stat. sec. 480-13(b).

Hawaii’s statute expressly requires causation:  if the allegedly deceptive act does not result in injury and damages, Hawaii citizens cannot recover under the statute.  The Yokoyama Court far exceeded the boundaries of the federal judiciary when it effectively re-wrote the legislature’s statute. It also seemingly forgot that Rule 23 is a procedural rule that is not intended to rewrite substantive law; in a class action, defendants must be allowed to present the same defenses to individual claims that they would have presented if the claims were brought individually.  The Yokoyama decision deprives the defendant of that right.

The court’s canard about damages not precluding certification also was overly simplistic.  That principle is applied in cases, like some securities class actions, where the calculation of damages is simplistic.  (E.g., plaintiff held X shares of stock, and the loss was Y dollars per share, so the damages were X x Y.)  But where, as in this case, even calculating the damages requires a highly individualized inquiry, courts frequently deny certification.

There can be little doubt, to those who know annuities, that calculating damages in the Yokoyama class action certified by the Ninth Circuit would be far from formulaic:

“[T]he amount of damage sustained by a single class member would depend on factors such as the financial circumstances and objectives of each class member; their ages; the [annuity plan] selected; any changes in the fixed interest rate for that [annuity plan]; the performance of the selected index; any changes in the index margin for that particular [annuity plan]; any cap on the indexed interest; the length of the surrender periods; whether the individual had undertaken or wanted to undertake an early withdrawal of funds; any benefit the individual policy holder derived from the form of the annuity itself, including the tax deferral of credited interest; and the actual rate of return on the [annuity plan].”

243 F.R.D. at 410-11.

If Yokoyama stands, other courts will be tempted to read the reliance and/or causation provision right out of the text of other states' deceptive trade practice statutes.  The specter of "damages" -- untethered to any concept of actual deception causing subsequent concrete financial injury -- would make the resulting class actions dangerous weapons for coercing settlements with no relation to actual harm, if any.

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

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

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

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

Id. at *4. 

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

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

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A few weeks ago a federal court in California issued a decision that has profoundly troubling implications for consumer fraud class actions.  See Wiener v. Dannon Co., 2009 WL 383650 (C.D. Cal. Jan. 30, 2009). 

In Wiener, the plaintiff challenged two of Dannon's brands that contain probiotic bacteria:  (1) Activia yogurt, which is advertised as "'scientifically proven' to naturally regulate digestion when eaten daily for two weeks," and (2) DanActive drinkable dairy product, which is marketed as "'clinically proven' to strengthen the immune system."  Id. at *1.  Dannon claims to have approximately twelve studies that support its claims about Activia, and approximately twenty-one that support its claims about DanActive.

The decision in Wiener starts off uncontroversially enough.  Plaintiff sought to represent a class of "[a]ll persons who purchased in California at any time up to August 1, 2008, DanActive, Activia or Activia Li[ght]," asserting claims under California's Unfair Competition Law, its Consumer Legal Remedies Act, and a claim for breach of express warranty.  The court denied class certification, holding that the plaintiff -- who had bought Activia, but had never bought DanActive -- was not typical of absent class members who had bought DanActive:

In cases involving a variety of products, courts, emphasizing that different products have different functions and different consumers, have held that a named plaintiff that purchased a different product than that purchased by unnamed plaintiffs fails to satisfy the typicality requirement of Rule 23(a)(3). . . . Dannon has made different health benefit claims regarding Activia and DanActive, which feature different types of probiotic bacteria . . . Therefore, the products target consumers with different health issues.  Moreover, different studies allegedly substantiate these health benefits.  Furthermore, the advertising and marketing of the two products is separate. . . .  In other words, the evidence needed to prove Wiener's claims involving Activia . . . is not probative of the claims of unnamed class members who purchased DanActive . . .

Id. at *4-*5 (citations omitted).  Nevertheless, the court gave plaintiff leave to amend to substitute into the case an appropriate class representative.  As a result, the court did not stop its analysis with typicality, but proceeded to address the other class action prerequisites.  The opinion goes downhill from there.   

The court found that the remaining prerequisites of Rule 23(a) were satisfied.  In analyzing predominance under Rule 23(b), the court acknowledged that reliance on the alleged misrepresentation was an element of plaintiff's causes of action.  Dannon argued that because there was a variety of different print, TV, in-store and other marketing materials, the nature of the alleged misrepresentation -- as well as whether it was material to the consumer's decision to buy the product -- would be individual issues that would have to be litigated for each class member.

The court disagreed, opining that at trial, plaintiffs could rely on an "inference of reliance" that "arises if material misrepresentations were 'made to persons whose acts thereafter were consistent with reliance upon the misrepresentation.'"  Id. at *8 (citation omitted).  Numerous courts, of course, have rejected just such a presumption of reliance, noting that although it may make sense in an "efficient market" like the securities market, which is capable of rapidly assimilating new information into the prices of stocks, the market for consumer goods is not "efficient," in that buyers often fail to take into account new information and make their purchase decisions based on any number of other factors, such as taste, personal preferences, brand loyalty and the like.  See, e.g., McLaughlin v. American Tobacco Co., 522 F.3d 215, 223-25 (2d Cir. 2008); International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., 929 A.2d 1076, 1088 (N.J. 2007).

The district court -- although aware that people buy consumer products for different reasons -- seemed to penalize Dannon for not having submitted expert proof as to what all of those individual reasons for purchase might be:

The record clearly establishes that the characteristic that distinguishes the Products from others on the market is their respective alleged health benefit.  Dannon has not pointed to any meaningful difference in flavor, serving size, or the like that might influence consumers' purchases. . . .  The Court is aware that many factors influence all consumers' purchasing decisions, a point which Dannon emphasizes, yet given the alleged misrepresentations are the distinguishing characteristic of the Products, the Court finds that these representations induced consumer purchases because without the alleged misrepresentations, there is no reason, even with sales, coupons, or other promotions, to suggest that purchasers would have selected the Products over other Dannon products or similar, generally less expensive, products by other brands. . . .  Thus, the Court finds that the evidence presently before the Court allows for an inference of reliance in this case.

Wiener, 2009 WL 383650 at *9 (citations omitted).

Interestingly, the court acknowledged that Dannon would have the right to rebut the inference of reliance, but it did not explain how that could be done manageably at trial.  Id. at *8.

Dannon also had pointed out the difficulty of proving individual damages in consumer products cases, where the products may have had very different prices, been subject to coupons or rebates, and may even have been returned for a refund.  The court, however, was having none of that argument.  It merely repeated the mantra that the calculation of individual damages should not defeat class certification, and posited that "actual damages for these claims can be calculated by subtracting the value of the Products without the claimed health benefits, a uniform value to be determined based on the evidence presented at trial, from the price that the particular class member is able to prove he or she paid."  Id. at *10.

Once the plaintiff in Wiener amends the complaint to add into the action another named plaintiff who actually bought DanActive, we can expect the court to certify the class action using the specious "presumption of reliance" that robs the defendant of its ability to present individual defenses regarding what actually motivated the product purchase decision.  Thankfully, Wiener lies far outside the mainstream of thought on reliance issues in consumer products cases.  But the opinion represents a troubling undercurrent of thought that too readily sacrifices the defendant's right to challenge individual claims in order to make it easier to try them in the aggregate.

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