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

On Monday, Law 360 reported that the judge in the Ford E-350 Van MDL denied class certification.  The opinion -- although it is designated "not for publication" -- is a strong and important reminder of why consumer fraud and warranty suits present individual issues that often preclude any ability to certify a class.  In re Ford Motor Co. E-350 Van Prods. Liab. Litig., MDL No. 1687, Civ. A. No. 03-4558, Slip op. (D.N.J. Feb. 6, 2012).

Plaintiffs alleged that Ford's "15-passenger" vans had a high center of gravity that leads to an unusually high risk of rollover, particularly where the van is full of passengers.  Of course, they brought a "diminished value" class action that excluded anyone who ever actually experienced a rollover.  Instead, the class sought recovery of the "diminished value" of the vans, as measured either in a decrease in the resale value or by the cost of a retrofit package that would add an additional axle and wheels to the vehicle.

The case had a tortured history of motions to dismiss and motions for summary judgment, such that the chart of remaining claims for plaintiffs from various states looked like a target shot full of birdshot.  Plaintiffs ultimately moved for certification of: (1) a breach of implied warranty class for residents of NY, NJ, PA, GA, and MI, (2) a consumer protection statute class for residents of NY, FL, and TX, and (3) an unjust enrichment class for residents of CA, GA, and PA.  In the alternative, they moved for certification of 8 statewide classes of "all purchasers" or others who acquired the vans within the class period.  The class period was defined as 1991 to 2005 for all proposed classes.  Slip op. at 5.

The court, citing Hydrogen Peroxide, recognized that it must give rigorous scrutiny to whether the plaintiffs had actually proven that the class action prerequisites were met.  It ultimately concluded that plaintiffs had not proven that the predominance requirement was met, and thus refused to certify the class action.  In doing so, it looked at each element of proof of each state law cause of action.  Although that led to a bit of repetition in the 86-page opinion, the court's decision can be boiled down to the following basic points.

1.  There was no uniform misrepresentation that every class member saw.  Sales brochures changed over time, some class members saw no representations, others received oral representations from salesmen, and the safety disclaimers changed over time.  And advertising changed over time for the product.  Ultimately, proof of the representation would have to be an individual issue.

2.  Class members were going to have to prove that they were actually deceived and acted to their detriment because of it.  Plaintiffs who never received a misrepresentation were not deceived.  Similarly, plaintiffs who read or heard the many media articles about the problem, or who -- incredibly -- had experienced rollover previously in other vans were not actually deceived.  Indeed, one plaintiff, in negotiating the price, warned the salesman that the vans could only be driven by experienced, trained drivers like himself.  These presented individual issues.  See Slip op. at 33 ("Considering that Plaintiff's primary theory of damages at the class certification stage is a common benefit-of-the-bargain injury, it stands to reason that the consumers who saw these reports and understood the E-350 van to have significant handling problems will have a difficult time proving causation, and in doing so, they would not rely on common proof.").  The court noted that --particularly in light of the published media reports about rollover and handling issues -- "Ford would be entitled to examine which class members had knowledge of the E-350's handling characteristics at the time of purchase, the extent of such knowledge, [and] whether the knowledge was derived from personal use or published reports."  Id. at 43; see also id. at 51.

3.  Plaintiffs would have to prove either that the product actually failed (e.g., exhibited a defect), or that they actually incurred repair costs or diminished value as a result of the defect.  Sliip op. at 35.  That is an individual injury.  The court noted that a so-called "reputational injury" that somehow inhibits resale value does not injure those plaintiffs who have no intention of selling their vans, and there was no evidence that the proposed retrofit would cure the speculated reputational injury.  Slip op. at 39.  Citing New York law, the court noted that a prior judge in this case had "properly recognized that [New York law] stopped short of requiring manifestation of the defect; yet, in the absence of such manifestation, [it] still required the plaintiff to present evidence of an actual injury, in the form of out-of-pocket repair costs or a sale at a loss."  Slip op. at 39-40.  The court also noted that "'[a] plaintiff who purchases a [product] that never malfunctions over its ordinary period of use cannot be said to have received less than what he bargained for when he made the purchase.'"  Id. at 41 (citation omitted).

These basic problems permeated the various causes of action:  implied warranty, consumer protection acts, and unjust enrichment.  Moreover, the court noted that in order to prove reliance on an "omission" under Texas's Deceptive Trade Practices Act, the plaintiffs would have to establish that they would not have bought the product if the information had been disclosed.  The record in this case clearly indicated that some plaintiffs bought the vans with full knowledge of handling problems and rollover risks -- primarily because they believed themselves qualified to drive the vehicle with the requisite skill.  As such, the reliance element of the DTPA presented individual issues that precluded class certification.  Slip op. at 56.

The court also noted at the end of the opinion that statute of limitations issues -- particularly on the warranty claims -- presented individual issues that also would be incapable of being proved on a classwide basis.

The court's opinion is another strong reminder that even in cases of so-called "omissions," the individual issues can preclude class certification.  The court explained that its "ruling reflects the unique and highly individualistic experiences of consumers, many of whom were not actually deceived and many of whom have suffered no actual injury as a result of Ford's conduct."  Slip op. at 79.

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District Judge Dennis M. Cavanaugh recently issued an opinion in a consumer warranty class action that provides a good illustration of basic principles of warranty law.  In Suddreth v. Mercedes-Benz, LLC, Civ. A. No. 10-CV-05130 (DMC-JAD), Slip op. (D.N.J. Oct. 31, 2011), the plaintiffs -- owners of 2006 Mercedes ML 350 cars -- brought a putative class action against Mercedes, claiming that their soccer mom cars were defective because the balance shaft gear had a tendency to wear out prematurely, causing the "check engine" light to illuminate and the car to misfire or stop running.  Mercedes had issued a technical service bulletin about the problem in 2007, and it changed the design of its engine in 2009.  

Mercedes moved to dismiss the lawsuit, and Judge Cavanaugh ultimately granted the motion.

Mercedes moved to dismiss the express warranty cause of action on the ground that the failures in plaintiffs' vehicles occurred outside of the 4-year/50,000 mile warranty.  Plaintiffs argued that the "defect" was latent in the vehicle during the warranty period, but the court noted that "[c]ourts have consistently rejected claims that a latent defect was present in a vehicle from the date of manufacture, when that defect did not manifest itself until outside of the warranty period."  Slip op. at 6 (citations omitted). 

Plaintiffs also argued that the warranty was unconscionable because it did not cover the expected useful life of the balance shaft gear.  The court rejected that argument, too.  It noted that merely knowing that a product might fail after the expiration of the warranty is not enough to make a limited warranty unconscionable.  Slip op. at 7.  Moreover, plaintiffs' use of their vehicles during the warranty period without failure simply cannot be classified as "nominal" use of the product.  Slip op. at 8.

As for the breach of implied warranty claim, the court focused on the fact that plaintiffs drove their cars for the full warranty period without incident:  "It is simply not plausible that a motor vehicle could be classified as not merchantable when it has been used for its intended purpose for 4 years and 50,000 miles."  Slip op. at 9.

Plaintiffs also had sued under various state consumer fraud statutes, arguing that Mercedes's failure to disclose these "known" defects was an unfair practice that violated the statute.  The court, analyzing the New Jersey Consumer Fraud Act, noted that where an allegedly defective product is alleged to have been under warranty, a claim for a defect that manifests after the warranty period cannot establish liability under the NJCFA unless "the manufacturer knew with certainty that the product at issue or one of its components was going to fail."  Slip op. at 10.  Because Mercedes had no certainty that the gear would fail, there was no liability under the NJCFA.  As for the other states' statutes, the court also relied on the fact that there was no evidence that Mercedes knew the gear's propensity to fail until after it had sold the cars.  It also held that the Massachusetts plaintiff's failure to provide statutory notice defeated his claim.

The court also dismissed claims for strict liability and negligence, relying on the economic loss doctrine.  Slip op. at 11.  And it dismissed the unjust enrichment claim, noting that the failure of the other causes of action that had alleged wrongful conduct meant that the unjust enrichment claim must be dismissed as well.

The decision in Suddreth makes it very clear that when you buy a product under a limited warranty and the product performs for the full life of the warranty, you have no cause of action if it subsequently requires repair.  No amount of creative lawyering about "latent defects" that allegedly existed "unmanifested" during the warranty period should change this basic fact.

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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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Today we have two cases that illustrate the maxim that if you have a beef with an airline, you're screwed, plain and simple, thanks to federal preemption.

In Hickcox-Huffman v. US Airways, Inc., 2011 WL 1585560 (N.D. Cal. Apr. 27, 2011), a passenger who had paid a $15 baggage fee sued the airline for the return of the fee because it lost her bag.  Naturally, this was a putative class action on behalf of all passengers who were charged such fees and their bags were lost or delayed.  Her theory was that by charging the $15, the airline assumed a duty to deliver the baggage in a timely manner.  She asserted a variety of causes of action, including breach of contract, unjust enrichment, and misrepresentation.

The airline moved to dismiss the claims as preempted by the Airline Deregulation Act of 1978, which provides that "no State . . . shall enact or enforce any law . . . relating to rates, routes, or services of any carrier."

What, then, is a service?  And does the timely conveyance of baggage fit within the definition?

The Ninth Circuit has held that although service involves the prices, schedules and other things associated with getting people and "cargo" from point A to point B, it does not include the "provision of in-flight beverages, personal assistance to passengers, the handling of luggage, and similar amenities."  Id. at *2 (quoting Duncan v. Northwest Airlines, Inc., 208 F.3d 1112, 1114-15 (9th Cir. 2000)).  Naturally, the airline said the plaintiff's bag was "cargo," while the plaintiff said it was "luggage," the handling of which is not a preempted "service."

The court looked to whether the underlying claims frustrate the goal of economic deregulation by interfering with the forces of competition:

Using this approach, this Court believes that Plaintiff's state law claims would do just that.  It is obvious that baggage fees are just one of the many fronts on which airlines are doing competitive battle.  Indeed, the baggage fees imposed (or not imposed) by each airline has become an important consideration for consumers. . . .  In these circumstances, Plaintiff's claims would impermissibly "frustrate the goal of economic deregulation by interfering with the forces of competition."

Id. at *4 (citation omitted).  Accordingly, it held that the plaintiff's claims were preempted, and US Airways could keep the $15 it charged to deliver her baggage late.

The passengers were similarly unlucky in National Federation of the Blind v. United Airlines, Inc., 2011 WL 1544524 (N.D. Cal. Apr.25, 2011).  There, blind plaintiffs brought a class action because the airline used ticketing kiosks that -- unlike Automatic Teller Machines -- use only visual prompts and fail to include an option for audio prompts for the blind.  The plaintiffs sought equitable and declaratory relief under various statutes.

Once again, the court held that the claims were preempted, this time by the Air Carrier Access Act, which prohibits discrimination against disabled people in air travel.  The Department of Transportation has specifically addressed the issue of automated kiosks, concluding that if they cannot be used by passengers with a disability, "you must provide equivalent service to the passenger (e.g., by assistance from your personnel in using the kiosk or allowing the passenger to come to the front of the line at the check-in counter)."  Id. at *3 (citation omitted).  DOT expressed its intent that the regulations have preemptive effect.

The court concluded that "[b]ecause the DOT has pervasively regulated airport kiosk accessibility, plaintiffs' claims are field preempted by the ACCA."  Id. at *4.

The court found an additional source for federal preemption in the Airline Deregulation Act that was at issue in Hickcox-Huffman.  The court concluded that the airport kiosks -- because they facilitate checking in, printing tickets, selecting seats, and other tasks related to air travel, they are a "service" that falls within the express preemption provision of the ADA.

The plaintiff argued for the "presumption against preemption" and suggested that the Federal Airline Act's savings clause -- "a remedy under this part is in addition to any other remedies provided by state law" -- augured against federal preemption.  The court disagreed:

The Airline Deregulation Act unequivocally declared that no state may enact a law related to airline service.  Congress could have drawn the preemption provision more narrowly; it did not.  The provision does not except discrimination claims from its scope.  Thus, this argument must fail.

. . .

. . . This area [of airline travel] has . . . "long been reserved for federal regulation."  The presumption against preemption, therefore, does not apply in the instant action.  Thus, neither the FAA savings clause nor the presumption against preemption undermine this order's holdings.

Id. at *7 (citations omitted).

As these two decisions -- rendered two days apart -- demonstrate, airlines have powerful preemption arguments against consumer class actions.  It remains to be seen whether the reasoning from these decisions -- especially the field preemption conclusion from National Federation of the Blind -- can be easily translated other federal regulatory schemes.

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Illinois' Fifth District Court of Appeal recently reversed the certification of a Madison County class action against an insurance company, holding that the litigation should have been dismissed on the merits.  See Coy Chiropractic Health Center, Inc. v. Travelers Casualty & Surety Co., No. 5-08-0578, Slip op. (Ill. App. -- 5th Dist. Mar. 14, 2011).

In Coy Chiropractic, plaintiff sought to represent a class of all licensed Illinois healthcare providers whose reimbursement for medical services covered by a workers' compensation policy was reduced by Travelers pursuant to a Preferred Provider Organization ("PPO") discount since February 2005.  Plaintiff alleged that when it joined a PPO network, it did so based on the understanding that the insurer would provide financial incentives to its members to stay within network.  Illinois's workers' compensation laws prohibit such incentives, so insurers do not pay them.  According to plaintiff, the insurer thus is not entitled to deduct the PPO discount when paying for workers' compensation medical services.  Plaintiff sued on theories of breach of contract, breach of Illinois's Consumer Fraud Act, and unjust enrichment.

Although the trial court had certified a class action on the claims, the Court of Appeal held that this was one of those cases where there was "no need to determine whether the prerequisites of the class action are satisfied" because "as a threshold matter, the record establishes that the plaintiffs have not stated an actionable claim."  Slip op. at 6 (citation omitted).

The court noted that the plaintiff and other service providers had not entered into a contract with Travelers directly.  Rather, they had signed PPO contracts with First Health, which then entered into a contract with Travelers to act as the payor on all workers' compensation claims.  Neither the PPO's contracts nor Travelers' "payor contract" required the insurer to offer financial incentives to workers' compensation payments.  Accordingly, the court held that the PPOs had no actionable claim for breach of contract.

The court then looked to Travelers' rights under its contract with First Health to conclude that plaintiffs had not alleged any breach of the Consumer Fraud Act.  First, it noted that the ICFA cannot be used to merely re-package deficient breach of contract claims; there must be an independent fraud.  There was no fraudulent statement actually identified here, and from the structure and terms of the contracts, it was plain that Travelers was entitled to take the PPO discount, even for workers' compensation medical services.

The court engaged in a similar analysis for the unjust enrichment count:  plaintiffs contractually agreed to accept discounted payments for in-plan treatment, even for workers compensation.  Moreover, there was a lack of privity between the PPO providers and Travelers.  The PPO providers treated their patients.  To the extent any quasi-contract arose for the reasonable payment for such services, it was between the treater and the patient.  Slip op. at 9.  To the extent the PPO providers are seeking to step into their patients' shoes and assert their claims against the workers' compensation payor, Travelers, they are bound by the exclusive remedy provisions of the Workers Compensation Law.  Id.

Coy Chiropractic is an excellent example of a court refusing to allow a party to turn a basic breach of contract suit into something more -- namely, a suit for fraud or so-called "unjust enrichment."  Where the contract clearly sets forth the rights between the parties, it is not enough for plaintiff to merely testify that he expected something different.

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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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Regular readers will recall that last year Michael Reese and his colleagues at Reese Richman earned the title of Torts Twit of the Month for their suit against the chocolaty beverage Yoo-hoo for its alleged failure to disclose the presence of partially-hydrogenated soybean oil -- even though it was printed right on the label. 

Well, they are at it again with another ridiculous food-based lawsuit in which they hope to ring the class action bell.  This time they have sued Quaker Oats, once again complaining about the presence of partially hydrogenated oil in food.  According to the complaint, Quaker Oats committed fraud by calling its foods "low fat," a "good source of calcium," "heart healthy," "made with whole grain oats," and containing "no high fructose corn syrup."  Compl. para. 3.  Reese does not allege that these statements are untrue individually.  Rather, he alleges that the manufacturer's failure to disclose on the front of the packaging the presence of trace amounts of partially hydrogenated oil -- which he compares to poison and alleges causes "cancer, birth defects, heart disease, diabetes, and many other fatal diseases" (Compl. para. 4) -- makes any statement about health misleading.

Of course, the FDA allows the use of partially hydrogenated oils -- or so-called "trans fats" -- in food, and has established regulations and guidance for how trans fats should be disclosed on product labeling.   Moreover, Quaker Oats places required nutritional information on the product label itself.  For example, the label for Quaker Chewy Granola Bars discloses that a 1-bar serving has 0 grams of trans fats.  Plaintiff does not plead that Quaker Oats fails to comply with FDA rules and regulations in listing the amount of trans fat at 0 grams per serving.  Rather, he complains that, under the FDA rules, there could be "nearly 5 [grams] of trans fat overall" in a 10-serving box.  But this is plainly consistent with FDA regulations, which talk of nutrition information in terms of individual servings.

Surprisingly, plaintiff -- a New York resident -- had his New York lawyers sue Quaker Oats at its headquarters in Chicago, seeking to apply the Illinois Consumer Fraud Act to the claims of a nationwide class customers who bought Quaker Oats products.  Of course, if counsel had read the decisions of the Illinois Supreme Court from Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100 (2005) through Barbara's Sales, Inc. v. Intel Corp. (Ill. 2007) and beyond, they would know that the Illinois Supreme Court has definitively held that Illinois's Consumer Fraud Act cannot be used by nonresidents to recover in consumer fraud actions, even against defendants domiciled in Illinois.  Simply put, Illinois has no interest in the extraterritorial application of its law to sales transactions in other states.  Quaker Oats ought to be awarded its costs for even having to move to dismiss that count.

Similarly, the express warranty and implied warranty claims should be dismissed on the pleadings as well.  FDA regulations allow much more trans fats than Quaker Oats has in its products.  The fact that there may be some trace amounts does not make the goods unmerchantable in the trade or unfit for human consumption.  Moreover, plaintiff cannot plead or prove that the express statements made about the goods are untrue.  And they comply with FDA rules and regulations.  Put simply, there is no reasonable ground for a breach of warranty action.

Plaintiff's "unjust enrichment" theory is equally flawed.  Although the complaint pleads that plaintiff paid an inflated or "premium" price for the foodstuffs because he believed they contained no trans fats, he will be just as unable to establish any sort of "premium" price for such products as the plaintiffs were in Weiner v. Snapple Beverage Corp. (S.D.N.Y. 2010), in which Judge Denise Cote dismissed similar claims for failure to establish any pricing differential and, thus, any injury.

In the end, this is yet another attempt by the plaintiffs' bar to achieve regulation through financially lucrative litigation.  Let's hope the courts in the Northern District of Illinois are as quick as other courts have been in deeming such misuse of the class action mechanism impermissible.

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When I first ran across Tennille v. Western Union Co., 2010 WL 4609732 (D. Colo. Nov. 8, 2010), I worried that Toni Tennille -- or worse yet, her husband/accompanist, the perpetually mute Captain -- had fallen on hard times and needed each of their remaining fans to wire them 20 bucks.  Then, I read the caption more closely and saw that the plaintiff was James P. Tennille.  A son, perhaps?  Toni Tennille is now 70, lives in Prescott, Arizona, and just celebrated her 35th anniversary of being married to The Captain.  (35 years?!  Talk about "Love Will Keep Us Together.")

Tennille v. Western Union is, in fact, about wire transfers.  Mr. Tennille apparently seeks to represent a class of people who wired money that was never claimed at the other end of the transaction.  Tennille claimed that the defendant had a duty to notify the senders that their funds had failed to go through or went unclaimed.  Instead, the defendant allegedly held on to unclaimed funds, accruing interest on them in interest-bearing accounts "until individual state unclaimed property laws trigger a notification obligation."  Id. at *1.  The defendant allegedly then attempted to return the principal, but retained the accumulated interest for itself.  Id.

Plaintiff seeks to represent a nationwide class of wire transferors, asserting claims for conversion, fraud, and unjust enrichment.  The defendant moved to dismiss, and the trial court denied the motion.

The court first determined that it would not matter what state's law governed the claim, since the laws that possibly applied (Colorado, Missouri, Illinois and Alabama) did not differ materially.  Then, in analyzing the unjust enrichment cause of action, the court reasoned that, regardless of which state's law applies, "[t]he essence of the claim is the retention of a benefit under circumstances where it would be unjust to return it."  Id. at *2.  The court rejected the defendant's argument that unjust enrichment could not apply because the underlying transaction was governed by a written contract.  Its reasoning, however, seems to articulate an exception that would swallow the rule:

While it is true that neither equity nor tort law provides a means for shifting risk one has assumed under contract, that maxim does not prevent recovery where the wrong alleged falls outside or exists independently of that contract. . . .  Here, where the terms and import of any express contract between the parties is in dispute, Plaintiffs' claims for unjust enrichment are not barred under any of the applicable states' common law.

Id. at *3 (citations omitted).  But how "in dispute" could the terms of this written contract really be?  Western Union is full of sharp employees.  It has to anticipate that customers may attempt to hold the company liable for funds that are not claimed, and you can bet that the form written agreement a customer signs addresses the issue of how that money will be handled, including interest.  If all that a plaintiff must do is merely plead that an agreement does not exist in order to get around the contractual bar to the equitable remedy of unjust enrichment, then the contractual bar is essentially worthless.

The court also adopted a novel approach to the defendant's statute of limitations challenge.  Although plaintiffs' claims were premised -- at least in part -- on the failure to notify the sender that the transfer did not go through, the court did not measure the three-year statute of limitations from the date of the transfer.  Rather, it chose to measure the accrual of the claim from the date years later when the defendant notified class members that the transfers did not go through.  Why?  "Because Western Union continued to generate and retain interest on Plaintiffs' unclaimed funds until such time as they notified Plaintiffs that their deposits had not been redeemed, Plaintiffs' claims did not accrue for statute of limitations purposes until then."  Id.

In addition, the court denied defendant's motion to dismiss the conversion claim, reasoning that it was essentially identical to the unjust enrichment claim, even though it had different elements.  The defendant had argued that the plaintiffs had failed to plead a demand and refusal for the interest, as required for conversion.  The court held -- with little analysis -- that "[i]f a technical 'demand and refusal' is necessary to state a claim for conversion of that interest, then the filing of these lawsuits clearly satisfies this requirement."  Id. at *4.

The court held the fraud claim in abeyance, and encouraged the parties to settle:  "Specific consideration should be given to resolving this case short of protracted litigation based on the rulings issued to date."  Id.

Ultimately, the decision in Tennille leaves me with same incomplete feeling I had when I first listened to Muskrat Ramble in the Seventies.  There's more to the defenses than is articulated in this opinion.

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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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I never cease to be amazed by people who believe that other people owe them a duty to save them money.  I've defeated a class action premised on this theory before, and so I was gratified to come across the recent decision in Levine v. Blue Shield of California, 2010 WL 4369797 (Cal. App. -- 4th Dist. Nov. 5, 2010).

In Levine, the plaintiff brought a putative class action against a health plan.  Literally.  He was both the named plaintiff AND the counsel for the putative class.  Here's his beef:  Blue Shield didn't tell him that if he had bought a different policy, he could have saved quite a bit of money in premiums.

You see, when 40-year-old Michael Levine first bought his policy, he was single.  He bought a policy for himself, and one for each of his two dependents.  A few years later, when he married his 25-year-old wife, she submitted an application to be added to his plan.  But if they instead had bought a new policy with the young wife as the primary insured and the dependents as part of a single family plan, they could have obtained the same benefits for significantly less premiums.  Michael alleged that Blue Shield had a legal duty to tell him this, and brought causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and violation of the Unfair Competition Law.

Both the trial court and the Fourth District Court of Appeal disagreed.  The appellate court noted:

[T]he Levines fail to cite any case in which a court has concluded that the covenant of good faith and fair dealing requires an insurer to disclose to the purchaser of insurance the lowest price that the insurer is willing to accept for insurance coverage.

Id. at *5.  The court relied on California Service Station etc. Ass'n v. American Home Assurance Co. (1998) 62 Cal. App. 4th 1166 to hold that the insurer has no duty to disclose pricing information to potential customers in an arm's length transaction.  In doing so, the court noted, "[W]e can conceive of no principled basis for concluding that Blue Shield owed the Levines a duty to disclose how the Levines could obtain the same health care coverage for a lower price, in view of the California Service Station court's holding that the insurer did not owe a duty to disclose the 'final negotiated price' itself."  Id. at *7.  It explained that although an insurer may have a duty to explain details about the coverage terms of a policy or how claims under it are processed, it has no duty regarding the price:

The amount of money that an insurer is willing to accept in exchange for coverage is not information that implicates the special relationship between an insurer and its insured, because it does not relate to coverage or the processing of claims.  We therefore reject the Levines' contention that the purported 'special relationship' between the Levines and Blue Shield gives rise to a duty of disclosure in this case.

Id. at 9 (citation omitted).

Because the plaintiffs could not plead a legal duty that the defendant violated, the court in Levine affirmed the trial court's dismissal of the entire case with prejudice.

Levine is an excellent reminder that parties negotiating a contract stand at arm's length and are not fiduciaries. 

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Do consumer product sellers have a duty to inform buyers about legal requirements associated with product installation and use? 

The Ohio Court of Appeals recently considered that question in Taylor v. Best Buy Co., 2010 WL 3931487 (Ohio App. Oct. 7, 2010).  In Taylor, a homeowner was shopping for a new stove.  She had received an estimate at Home Depot, and Best Buy offered to match it, and to install the stove at a special price of $49.99.  The salesman told her:  "We do this all the time.  We take it, we install it, and it will be in your house ready to go.  You can cook dinner that night."  Slip op at *1.  

Plaintiff didn't know that Ohio law requires every gas outlet to have an individual shut-off valve within 6 feet of the appliance.  Her shut-off valve was in the basement, far from the gas outlet in her kitchen.  Plaintiff did not tell the salesman that she had an old home or discuss in any way the necessity for a shut-off valve.

In what must have been a huge disappointment, Best Buy arrived at plaintiff's house with the stove, but then refused to install it because to do so would be against the code.  Best Buy's installers are not licensed plumbers; they informed plaintiff that she needed to find a licensed plumber to install a shutoff valve before they could install a stove.

Plaintiff hired a plumber, whom she paid $68 to install a shut-off valve.  Best Buy then installed the stove for $49.99; it apparently did not charge her for the earlier failed installation attempt.

Plaintiff complained, and Best Buy offered her a courtesy check of $75.  Plaintiff didn't cash it, but instead filed a putative class action for fraud, breach of warranty, unjust enrichment, breach of contract, and violation of Ohio's Consumer Sales Practices Act.  The trial court granted summary judgment for defendant.  And the Court of Appeals affirmed.

The court was unequivocal that the burden was on the homeowner -- not the appliance seller -- to know and comply with state law:

Best Buy had no responsibility to ensure that Taylor's home was code-compliant before delivering and installing Taylor's new stove.  Under Ohio law, Taylor is required to have a gas shut-off valve present near the stove.  This duty exists independent of any agreement between the parties. . . .  In this instance, Taylor's failure to have the required shut-off valve was a violation of state code and a safety concern.  Pursuant to Best Buy's policy, once Taylor's home was made code-compliant, Best Buy performed the installation for the contracted price and fulfilled its contractual obligations. . . .

Taylor further argues that Best Buy falsely represented that it would install the gas stove for a stated price.  We agree with Best Buy's position that it had no duty to inform Taylor of applicable codes and that it performed the represented service for the stated price once Taylor complied with code requirements. . . .

Id. at *2.

Notably, Best Buy actually included in its product brochure information about the code requirement, although plaintiff claimed never to have read it.  The court said that although including information about the code in the brochure made sense where the issue was commonplace, Best Buy was under no duty to do so.  In fact, it held that plaintiff could not prove reliance on any representations by Best Buy because "[t]he presence of a shut-off valve as required by state code is a matter of law which Taylor is presumed to know."  Id.

This decision highlights an important defense in many consumer product cases:  the requirements of state law.  Although this decision involved summary judgment, the conclusive nature of this defense often can support a motion to dismiss because it operates as a matter of law.  This Court's twin conclusions of "no duty" and "no reliance" as a matter of law served as the basis for summary judgment on a variety of claims, from fraud, contract, "unjust enrichment" and the Consumer Sales Practices Act.

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District Judge David H. Coar has issued an important opinion analyzing Rule 23(b)(3)'s superiority requirement in the context of recalled products with manufacturer-sponsored refund programs.

In In re Aqua Dots Prods. Liab. Litig., 2010 WL 3927611 (N.D. Ill. Oct. 4, 2010), Judge Coar was the MDL transferee faced with 14 putative class actions that were brought in the wake of Spin Master's recall of its Aqua Dots toys.  Aqua Dots, you may remember, are small, brightly-colored beads that fuse together when sprayed with water.  In 2007, Spin Master discovered that they had been manufactured with the wrong adhesive -- one that was converted by the human body into the illegal drug gamma-hydroxy butyrate (GHB, known as the "date rape drug") when ingested.  In conjunction with the CPSC, Spin Master voluntarily recalled approximately 4.2 million Aqua Dots products on November 7, 2007.  Of those, over 1,300,000 had been sold to consumers.

The recall was all over the news, and retailers like Wal-Mart, Target and Toys "R" Us collected the toys and issued refunds.  In total, roughly 600,000 products were returned -- usually for a refund, although some consumers accepted a free replacement toy.  The recall/refund offer for the affected Aqua Dots products remains available to this day, and there was no evidence that anyone was denied the right to return an affected product for a refund.

Despite the success of the recall/refund program, Spin Master was hit with so many putative class actions that an MDL was formed.  The cases generally fell into three groups.  One wanted a nationwide class for alleged violations of reporting requirements under the federal Consumer Product Safety Act.  There were nine single-state classes asserting state-law claims of unjust enrichment, breach of express and implied warranties, and violations of state consumer protection statutes.  And there was an unjust enrichment class seeking four subclasses composed of groupings of states with materially identical requirements.  Apparently each class also wanted punitive damages and/or treble damages and declaratory or injunctive relief. 

Judge Coar began his analysis with the superiority requirement because he found that it ended the inquiry.  The initial question was a legal one:

A threshold legal question is whether a defendant-administered refund program may be found to be superior to a class action within the meaning of Rule 23(b)(3), which permits the court to certify a class only if it finds, among other things, that "a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

Id. at *3.

As Judge Coar explained, the cases on the question are split between the "textual approach" -- which holds that the term "adjudicating" precludes consideration of non-judicial alternatives -- and the "policy approach" -- which focuses on the efficiency purpose of the inquiry thus asks whether nonjudicial remedies may obviate the need for court involvement.  Id.  The court undertook a thorough examination of the precedents supporting the policy approach (going back to 1967), and it sided with them, concluding that "when a defendant already is offering an effective remedy for putative class members through out-of-court channels, a class action threatens to consume substantial judicial resources to no good end."  Id.

Judge Coar grounded much of his opinion in Thorogood v. Sears, Roebuck & Co., 547 F.3d 742 (7th Cir. 2008), observing that by ensuring that the class action is premised on the realistic prospect of a remedy that the class members could not otherwise obtain, the court is also protecting the interests of absent class members, who may have different interests than those of class action lawyers who want to obtain a fee for providing the same or similar relief.  Aqua Dots, 2010 WL 3927611 at *5.  The court even noted that none of the named plaintiffs in the case before it had requested a refund from the defendant, and that class counsel had expressly advised one such plaintiff not to do so.  The court concluded:

At bottom, this is a suit to recover the purchase price of tainted Aqua Dots.  Since the defendants will provide a refund -- without needless judicial intervention, lawyer's fees, or delay -- to any purchaser who asks for one, there is no realistic sense in which putative class members would be better off coming to court.  From their perspective a class action is not the superior alternative.  The court therefore declines to certify any of the proposed classes.

Id. at *7.

Judge Coar also had some important things to say about unjust enrichment class actions, which he said were "fraught with procedural and choice of law problems that further preclude certification."  Id.  Even with the subclassing proposed by the plaintiffs, Judge Coar concluded that the classes were unmanageable because the legal rules simply were not identical:

Furthermore, the unjust enrichment subclasses pose insurmountable choice-of-law problems.  As other members of this court have pointed out, the law of unjust enrichment varies too much from state to state to be amenable to national or even multistate class treatment.

Id. at *8.  He gave a number of examples, and then concluded that it was "emphatically not the case here" that the subclasses were governed by the same legal rules, "and any attempt by the court to tinker with the composition of the subclasses to satisfy this requirement would be futile anyhow."  Id. at *10.

Judge Coar's decision should give encouragement to defendants who -- faced with the need to recall a product -- do the right thing and implement a robust recall and replacement program.  His opinion would suggest that the more that you can document how successful your recall was -- and promote the ease of obtaining the refund for all class members -- you may have a substantial defense to so-called "economic loss" class actions that ordinary defendants simply do not possess.

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As regular readers will recall, April's Tort Twits of the Month were some lawyers who had sued Unilever in a BS class action, claiming that its statement that Breyer's Smooth & Dreamy ice cream contained one third less calories than regular ice cream was false and deceptive merely because Breyer's had a non-dietary version of some flavors that was not a full one-third more calories than Smooth & Dreamy.  Ercoline v. Unilever United States, Inc., Civ. A. No. 2:10-cv-01747-SRC-MAS (D.N.J.).  But it was clear that Smooth & Dreamy had more than a third less calories than other non-diet brands, such as Unilever's own Ben & Jerry's.  As I stressed in my post, it's ultimately the calorie count that counts -- particularly for foods made for people on diets -- and Unilever had posted such counts squarely on each box of Smooth & Dreamy ice cream.  I vowed to follow up on this frivolous litigation.

Fast forward 6 months.  The defendant had moved to dismiss the case, and the motion was set for hearing in October.  But lo and behold, the parties have jointly moved for certification of a settlement class!  Plaintiff's brief in support can be found here, and the settlement agreement is here.  What could possibly persuade the defendant to settle such a ridiculous claim?  How about this:

     *  No payments to the class.  None.

     *  Changing the label to read:  "This product has __ calories and __ fat per serving vs. a range of full fat ice creams that averages __ calories and __ fat per serving."

     *  A full release of claims (however frivolous) from the class.

I can understand that it's tough to resist such a sweetheart deal to get rid of truly frivolous litigation.  And yet, the legal purist in me chafes at the way in which the settlement compensates those who brought such claims in the first place:

     *  Although no class member receives a dime, the lawyers who brought this ridiculous suit 6 months ago may ask for up to $200,000 in attorneys' fees, which the defendant will pay without objection.  (Paragraph 12.1.)

     *  The named plaintiff may ask for an award of up to $5,000 for himself.  (Id.)  Of course, such "incentive awards" -- where they are even allowed -- are usually to compensate a class representative who went through discovery and a deposition on behalf of the class.  It does not appear from the settlement agreement that any discovery has taken place in this case, let alone discovery of Plaintiff.

A number of other details about the settlement also caught my attention.  First, there is a liberal blow up provision, which allows the parties to cancel the settlement if the court changes the deal or too many people opt out.  (Paragraph 11.1.)  And the Defendant may terminate if the class counsel fees exceed the limit in Paragraph 12.1.  Interestingly, the settlement also is terminable if "any state attorney general, or any federal or state agency, regulator, or authority" objects to the settlement, requires a modification to it, or commences a proceeding.

The notice provision is interesting, too.  Defendant pays the cost of the notice, which is capped at $25,000 and appears to consist entirely of one weekday ad in USA Today and a website that posts the settlement notice for 45 days.  (Paragraphs 9.2-9.4.)  There is also a "no publicity" provision, which provides that the "Class Representatives and Class Counsel shall not cause any aspect of the Litigation or the terms of this Settlement Agreement to be reported in the media or news reporting services."  (Paragraph 13.1.)  I should confess here that I first saw this settlement mentioned in a Law 360 article (subscription required) that included the preliminary approval order, but did not include the settlement agreement itself.

Notably, any objector "may be subject to a deposition prior to the Final Approval Hearing and shall provide a detailed list of any other objections by that objector to any class action settlements submitted in any court, whether state, federal or otherwise, in the United States in the previous five (5) years."  (Paragraph 10.2.)  The deposition potential for objectors is mentioned in the short form and long form notices.

Strangely, the release includes a provision in which the Defendant releases the Plaintiff and his lawyers from any claim "relating to or arising from the Litigation, including, but not limited to, any claim that this Litigation was not prosecuted in good faith."  (Paragraph 7.2.)

The fairness hearing is set for March 21, 2011.  For the Defendant's sake, I hope this settlement can finally put these ridiculous consumer fraud claims to rest.  But I'll confess, it will gall me to see one penny awarded to class counsel or the class representative.  From the provisions of their settlement agreement, it appears to me that securing their own monetary award for bringing these frivolous claims was far, far too important to them.  Such behavior should not be rewarded.

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It's not every day a Supreme Court Justice chastises you for not reading your credit card statement.  But that's effectively what Justice Sandra Day O'Connor did in affirming the dismissal of a consumer's breach of warranty and unjust enrichment claims based on the voluntary payment doctrine.  See Spivey v. Adaptive Marketing LLC, 09-3619, Slip op. (7th Cir. Sept. 20, 2010).

(Please note that Adaptive Marketing is a client of mine.  Neither I nor my firm had involvement in this case, however.)

In Spivey, plaintiff had called a toll-free telephone number to order an Atkins diet product.  At the end of the transaction, the telemarketer offered to enroll plaintiff in a 30-day free trial of a membership program, "HomeWorks," that provides discounts to various home goods stores.  Afterward, if plaintiff did not cancel the membership, the telemarketer explained, he would be enrolled in the program annually and incur an annual fee that would be charged to his credit card.  Plaintiff accepted the trial membership and did not cancel his membership, so he was enrolled in the program and incurred membership charges in 2003 through 2007.  In 2007, plaintiff challenged the charge and subsequently filed his lawsuit.

The trial court -- relying on plaintiff's deposition testimony and the membership materials that the defendant testified it sent to plaintiff -- granted the defendant's motion for summary judgment, relying on the voluntary payment doctrine.

The Seventh Circuit affirmed.  In an opinion written by Justice O'Connor, who was sitting by designation, the court explained that the voluntary payment doctrine "has long been recognized in common law" and means that "'[a]bsent fraud, coercion, or mistake of fact, monies paid under a claim of right to payment but under a mistake of law are not recoverable.'"  Slip op. at 13.  Put differently, if you voluntarily pay someone who was not legally entitled to payment, you cannot sue to recover the money absent fraud, coercion, or mistake.

As Justice O'Connor explained, the reason for the doctrine is clear:  the payor is the one with the incentive to challenge the payee's legal right to receive payment, and the law wants to encourage the payor to do that at the earliest opportunity so that the parties can be aware of each other's position and tailor their conduct accordingly.  Litigation should precede payment, not the other way around.  The common law does not want to encourage people to pay "in silence" and then later file a lawsuit.  See slip op. at 14 (citations omitted).

The plaintiff did not dispute that the charges for the HomeWorks Plus program appeared on his credit card statements in 2003, 2004, 2005, 2006, and 2007.  They even included a telephone number to call about that particular charge.  But plaintiff nevertheless argued that the "mistake" exception to the voluntary payment doctrine should apply here because he mistakenly believed, when looking at the statements, that the "HomeWorks Plus" charges were for products that his wife -- a school teacher -- had bought.

Justice O'Connor made short work of this argument, effectively holding that plaintiff had a duty to read and investigate the charges on his credit card statement:

Spivey cannot overcome the voluntary payment defense because he made an erroneous assumption for four years that could have been easily clarified, as it ultimately was, by discussing the charge with his wife and making a call to the phone number provided on his bill.

The relevant facts regarding the basis for and means to challenge the HomeWorks charge were neither obscured, nor inaccessible. . . .

In the five years during which HomeWorks charges appeared on Spivey's credit card bills, "he made no effort to discover the nature of the charge to his credit card and paid it 'in silence.'  To the extent that Spivey was ignorant of the charges on his credit card statement, it was because he failed or refused to apprise himself of that knowledge and he must bear the consequences."  [Quoting the district court.] . . .  Where, as here, "the plaintiff's lack of knowledge could be attributed to its lack of investigation into the defendant's claim of liability and the basis upon which the defendant was seeking the [payment]," the Illinois courts have rejected a mistake of fact claim.  We agree.  

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

Spivey is a strong reminder that consumers have a responsibility to read their bank and credit card statements and cannot sue to reverse payments made to a business where they could have discovered the basis for the business's claimed entitlement to the money, but simply chose not to do so.  Laziness or willfully sitting on one's rights is not the sort of "mistake" that can defeat the voluntary payment doctrine.

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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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Regular readers of this blog know that there are a plethora of decisions dismissing class actions brought by so-called "third party payors" (e.g., union health and benefit plans) to recover sums they paid for medicines that their members took.  Typically, courts hold that the injury in such cases is simply too remote for the third party payors to have standing.  Put differently, courts hold that the defendant's challenged conduct is not the direct cause of these third party payors' "injuries" because the decision to prescribe and take the medicine was a result of the independent conduct of prescribing physicians and their patients.

Last week the MDL court in the Yaz Marketing, Sales Practices and Products Liability Litigation reached the same conclusion after canvassing the case law.  See Philadelphia Firefighters Union Local No. 22 Health and Welfare Fund v. Bayer Healthcare Pharmaceuticals, Inc., 3:09-cv-20071-DRH-PMF, Slip op. (S.D. Ill. Aug. 5, 2010).

The class definition in Philadephia Firefighters was as broad as could be:  "'[a]ll third party payors in the United States and its territories that purchased, reimbursed, and/or paid for all or part of the cost of YAZ dispensed pursuant to prescriptions in the United States.'"  Id. at 2.  Plaintiffs pled causes of action under RICO, as well as common law negligence, fraud, misrepresentation, and unjust enrichment.  (Notably, plaintiffs did not plead state consumer fraud statutes.  Presumably this was because the state consumer fraud statutes are simply too different to be adjudicated in a single class.)  Plaintiffs' theory of the case was that although Yaz was approved by the FDA as an oral contraceptive and to treat moderate acne and Premenstrual Dysphoric Disorder (PMDD), the defendant had promoted Yaz to treat off-label conditions like mild acne and Premenstrual Syndrome (PMS) without telling people about the substantially increased risks of heart and gallbladder problems from the medicine.  This allegedly caused the market for Yaz to expand and allowed the defendant to maintain a "falsely inflated price" for Yaz.  Id. at 6.

The court began its analysis by considering whether the plaintiffs had the necessary standing to assert a RICO claim under federal law.  Reciting the Supreme Court case law, the court observed that RICO requires plaintiffs to show not only that defendant's conduct was a "but-for" cause of their injuries, but also that it is the proximate cause as well.  In other words, there must be a direct relationship between the injury asserted and the injurious conduct alleged.

The court surveyed a majority of the third party payor opinions, concluding that the injury to third party payors is simply too remote and speculative to meet RICO's direct injury requirement.  The court adopted the reasoning of Ironworkers Local Union No. 68 v. Astrazeneca Pharmaceuticals LP, 585 F. Supp. 2d 1339 (M.D. Fla. 2008), explaining:

[P]hysicians use independent medical judgment to decide whether to prescribe the subject drug to a particular patient and that judgment can be influenced by any number of factors.  Accordingly, establishing that the third party payor's injuries were caused by the alleged misconduct would require an inquiry into each doctor patient relationship to determine whether the physician was influenced by the alleged misrepresentations and to what extent.

Philadelphia Firefighters, Slip op. at 16.

The court concluded that "multiple steps separate the alleged wrongful conduct . . . and the alleged injuries . . . including patient preference, the independent judgment of the prescribing physician, and the reimbursement decision rendered by the third party payor and its benefits manager."  Id. at 18.  Accordingly, the complaint flunked RICO's direct injury requirement.

The court applied the same analysis to plaintiffs' common law causes of action, finding no proximate causation for negligence, misrepresentation or fraud.  As for unjust enrichment, the court reasoned that because that theory was based on an underlying tort, and no tort cause of action had been sufficiently pled, the unjust enrichment complaint also failed as a matter of law.

Philadelphia Firefighters is a strong opinion that confirms what already has become quite clear:  although plaintiffs lawyers have gravitated toward these claims as a way to possibly avoid learned intermediary and causation defenses, the overwhelming weight of authority is that third party payors stand far too remote from the medical treatment decisions to plead proximate causation.

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The Nattering Nutrition Nannies scored a victory last week in the Eastern District of New York -- a victory against beverage giant The Coca-Cola Company and, more important, a victory against common sense and personal responsibility.  Last Wednesday, the Center for Science in the Public Interest and its co-counsel persuaded a federal court to deny Coca-Cola's motion to dismiss a putative nationwide consumer fraud class action challenging the beverage "vitaminwater" made by Coca-Cola's subsidiary, Glaceau.  See Ackerman v. The Coca-Cola Company, No. CV-09-0395 (JG) (RML), Slip op. (E.D.N.Y. July 21, 2010).

In Ackerman, Plaintiffs allege that the name, "vitaminwater," along with a description of the vitamins in the water and slogans about health are deceptive because they mislead people to believe that the beverages do not have sugar or calories in them.  As the court described plaintiffs' theory:

The plaintiffs have sufficiently alleged that the collective effect of the challenged statements was to mislead a reasonable consumer into believing that vitaminwater is either composed solely of vitamins and water, or that it is a beneficial source of nutrients rather than a "food of little or no nutritional value [which has been fortified] for the sole purpose of" claiming or implying that it is "healthy."  58 Fed. Reg. 2478, 2522.

Slip op. at 32.

Of course, there's one major problem with that theory:  the nutrition facts label on every bottle of vitaminwater discloses that there are a certain number of grams of sugar in the product, and that an 8 ounce serving of the drink contains a certain number of calories.  So the fact that there is an ingredient other than vitamins and water -- namely, sugar -- is plain to anyone who can read.  Nevertheless, the court allowed this claim to survive the pleading stage, so now there will be lots of expensive discovery and motion practice on a theory that is patently ridiculous.

(An additional sign to the consumer that there is something besides vitamins and water in the product is the fact that it is sweet -- some might even complain that it is cloyingly sweet.  This has led Glaceau to release "vitaminwater 10," which has ten calories per serving, and now  "vitaminwater zero," which has -- you guessed it -- zero calories per serving.  The court ducked the sweetness argument by stating that "there is no evidence before me concerning vitaminwater's taste."  Slip op. at 35.)

The court's response to the fact that sugar is listed as an ingredient right on the label was to declare that "the presence of a nutritional panel, though relevant, does not as a matter of law extinguish the possibility that reasonable consumers could be misled by vitaminwater's labeling and marketing."  Slip op. at 34.  The court relied heavily on Williams v. Gerber Products Co., 552 F.3d 934 (9th Cir. 2008), in which the Ninth Circuit had held that the packaging of a product called "Fruit Juice Snacks" could be misleading where it pictured various fruits on the label, but did not actually contain the juice of any of the pictured fruits, and only revealed this fact on the product label.

But Ackerman is no Williams.  There were no allegations that the packaging or marketing for vitaminwater contained any false statements or pictures.  Unlike the "Fruit Juice Snacks" at issue in Williams, which did not contain the juice of the pictured fruits, vitaminwater actually contains the vitamins the marketing discusses.  And the fact that it also contains sugar is stated right on the Nutrition Facts label in close proximity to the disclosures of the percentages of the vitamins and minerals that would surely interest vitaminwater's consumers.

This complaint is as deficient on its face as the Crunchberries complaint that I discussed earlier this month.  Reasonable people should not, as a matter of law, be allowed to claim surprise at the presence of an ingredient that is clearly disclosed on the Nutrition Facts label.

Although the court in Ackerman gave lip service to the pleading requirements of Twombly and Iqbal, it ultimately held that conclusory allegations met the pleading standard.  Indeed, it credited the following as adequately pleading the fact of reliance:

Each plaintiff relied on Defendants' . . . misrepresentations that VitaminWater is a beneficial dietary supplement beverage including, but not limited to, "vitamins + water = all you need" and the name of the product itself -- "VitaminWater" -- in deciding to purchase vitaminwater.  Had Plaintiffs known the truth that the statements they relied on were false, misleading, deceptive, and unfair, they would have neither purchased VitaminWater nor paid the premium price Defendants charged for it.

Slip op. at 40. 

The court refused to dismiss causes of action under California's Unfair Competition Law, False Advertising Law, and the Consumer Legal Remedies Act, as well as under New York's General Business Law sections 349 and 350.  It also refused to dismiss plaintiffs' common law misrepresentation claims for NY and CA plaintiffs and the unjust enrichment claims for all plaintiffs. 

Notably, the court was forced to conclude that plaintiffs' claims under the New Jersey Consumer Fraud Act failed to state a claim because they failed to plead enough specifics as required by Federal Rule of Civil Procedure 9(b). 

The court also held that plaintiffs failed to plead a claim for breach of express warranty because they failed to set forth any statement made about the product that the product failed to meet.  In addition, the court dismissed the implied warranty claims because -- even crediting the complaint as true -- "plaintiffs cannot establish that vitaminwater failed to constitute a merchantable product."  This, of course, begs the question:  if, as a matter of law, everything the defendant said was true (such that it did not constitute a breached warranty), and the sugar content was listed on the product itself and did not make the product unmerchantable, how could the packaging and marketing be "fraudulent"? 

The first half of the court's opinion is comprised of a recitation of the regulatory history regarding adding nutrients to foods and beverages.  Ultimately, the court rejected the defendants' arguments that the lawsuit was expressly and/or impliedly preempted by statutes and regulations preventing states from imposing labeling requirements that are different from those imposed by the FDA.  See, e.g., Slip op. at 27.  The court concluded that although plaintiffs' claims were premised on violations of the federal statutes and regulations, they were not preempted because they sought to impose "identical" requirements under state law as those imposed by the federal scheme.  The court also rejected the defendants' primary jurisdiction argument, stating that the question of what could mislead a reasonable consumer is one courts typically handle, and reasoning that the "FDA is aware of plaintiffs' concerns but lacks the resources to take enforcement action in every instance in which its policies are violated."  Slip op. at 30.

But plaintiffs legal assault on the fortified beverage industry ignores one important fact:  the public wants nutritionally-enhanced foods and beverages.  Indeed, fortified beverages are one of the fastest-growing market segments.  Consumers are capable of reading nutrition labels and ingredients and making dietary choices for themselves, and they do not need the FDA or self-appointed nutrition nannies like CSPI to limit the products from which they can legitimately choose.  Although the FDA has articulated policies about adding nutrients to foods and beverages, it has not acted to eliminate the category of nutritionally-enhanced products from the market.  One benefit of limited regulatory resources is prioritization, and instances of actual fraud should take (and generally have taken) enforcement priority. 

The Ackerman court's opinion on express and implied warranties makes it clear that there is no real fraud or misrepresentation in the marketing or packaging of vitaminwater.  The label clearly discloses the product's sugar content.  As such, CSPI should move on to lawsuits that fight actual fraud, rather than trying to co-opt the courts into doing what the FDA to date has refused to do.

To read CSPI Litigation Project Director Steve Gardner's take on the decision, click here.

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These days, the common offshoot of a manufacturer's settlement with a regulator or an attorney general is a wave of copycat lawsuits brought by lawyers who merely duplicate the allegations in the plea agreement or the government's case and paste them willy-nilly into a class action complaint.  Often, these lawyers have not even gone to the trouble of finding plaintiffs who can support the allegations with respect to the products at issue.  And when the defendant moves to dismiss, as defendants inevitably do, the retort is typically something like:  "They paid lots of money in fines to the government, so there simply must be a class action here."

Recently, some of my colleagues at my firm succeeded in obtaining the dismissal of a class action that had followed on the heels of a settlement with the government.  See Zafarana v. Pfizer Inc., Civ. A. No. 09-cv-4026 (E.D. Pa. July 19, 2010). 

In Zafarana, the manufacturer of prescription medicines had settled with the US Department of Justice allegations that it had engaged in various unlawful methods of promoting 12 of its medicines for so-called "off-label uses," i.e., uses that had not yet been approved by the Food and Drug Administration.  The settlement had involved a fine that was reported to be over $2 billion.

Of course, regular readers of this blog know that it is not illegal for doctors to prescribe medicines for off-label uses.  In fact, they do so all of the time.  Accordingly, the fact that a manufacturer may violate the Food, Drug, and Cosmetics Act in promoting a medicine for an unapproved use does not mean that people necessarily have been injured by such conduct.  Indeed, the use of medicines for off-label purposes can be standard medical care for certain health conditions.

In Zafarana, after the defendant's settlement with the government, two plaintiffs sued the defendant in a copycat class action, claiming to represent all people who had ingested all 12 of the medicines covered by the settlement.  (Of course, the two plaintiffs had not themselves ingested all 12 medicines and thus could not possibly be class representatives for the medicines they had not taken themselves.)

Plaintiff Zafarana had taken the medicine Lyrica for roughly a year for the off-label purpose of treating idiopathic torticollis.  She pled that she received no medical benefit from the medicine and suffered two of its side effects:  weight gain and blurred vision.  She also alleged that she paid more for Lyrica than an alternative treatment of Tylenol and stretching.

Plaintiff Dumville had taken Geodon for a short, undisclosed period of time for the off-label purpose of treating his depression.  (Geodon had been approved by the FDA to treat schizophrenia.)  He alleged that he received no benefit from the medicine and immediately stopped taking it because of "a number of severe side effects."  He also alleged that there were cheaper alternative treatments.

Plaintiffs alleged violations of various states' consumer protection statutes, "conspiracy/concert of action/aiding and abetting," and unjust enrichment.

The District Court began by considering the defendant's argument that the lawsuit was really just an attempt to enforce the FDCA.  There is no private right of action in the FDCA.  The District Court ultimately rejected this argument, finding that plaintiffs could sue on independent state law causes of action that were not merely premised on FDCA violations.  

The court also rejected the defendant's argument that the case was barred by the statute of limitations, reasoning that there was an issue of fact as to the "discovery rule," i.e., when plaintiffs knew or should have known that they had a cause of action.  Notably, the court held that fraudulent concealment would have been unavailable to toll the statute of limitations because the complaint did not point to any separate act of fraud committed by the defendant to conceal the injury.  Slip op. at 14.

The court next analyzed the amended complaint count by count.  Plaintiff Zafarana was a New Jersey resident and had sued under New Jersey's Consumer Fraud Act (the "NJCFA").  The defendant argued that her claim was barred by the New Jersey Product Liability Act (the "NJPLA"), which applies to any claim for personal injury or property damage allegedly caused by a product.  Analyzing the terms of the statutes, the court concluded that Ms. Zafarana's NJCFA claims that the medicine did not cure her health problems and that it caused side effects were barred by the NJPLA.  However, the court held that the NJCFA claim that she paid more for Lyrica than she should have was not barred by the NJPLA because it did not involve personal injury or property damage.

Ultimately, however, the court held that the "inflated cost" claim was barred by the terms of the NJCFA because it failed to allege in the amended complaint an "ascertainable loss" that was "caused by" the challenged conduct.  The court noted that New Jersey's Supreme Court has rejected a fraud-on-the-market theory, and thus plaintiff must plead a real loss and that the loss was caused by the defendant's conduct.  Ms. Zafarana did not do this:

Plaintiffs, however, simply have not stated any facts that make it plausible that a less expensive alternative would have been prescribed.  Plaintiffs seem to ignore the role played by the prescribing physician in this case.  They have not stated, and likely cannot state, that they would have been prescribed other, less costly medications, but only that they could have been prescribed such medications.  It is also true, however, that they could have been prescribed a more expensive medication, or a combination of other medications that , while individually less expensive, were cumulatively more expensive.  Due to the discretion of the prescribing physician, the injury alleged is entirely hypothetical, and cannot provide the basis for a claim under the NJCFA.

Slip op. at 20.

Analyzing Plaintiff Dumville's statutory claim, the court first had to determine what law applied.  Although Dumville was now a resident of Wisconsin, he was treated and consumed the product in Pennsylvania.  Thus, Wisconsin's consumer fraud statute was irrelevant; the court applied Pennsylvania's instead.

Pennsylvania's Unfair Trade Practices and Consumer Protection Law (the "UTPCPL") also requires plaintiff to plead an ascertainable loss "as a result of" the allegedly deceptive conduct.  The court held that Mr. Dumville had failed to plead causation because he could not establish his own justifiable reliance on the defendant's statements -- as required by Pennsylvania courts interpreting the statute -- because of the role of the prescribing doctor as a learned intermediary.  Slip op. at 23-24.

The District Court made quick work of plaintiffs' conspiracy allegations.  The court rejected the claims under New Jersey and Pennsylvania law, respectively, because the complaint failed to plead an underlying independent cause of action, which is required for civil conspiracy claims.  Moreover, Pennsylvania requires that the conspiracy have as its sole purpose injuring the plaintiffs; plaintiffs could not plead that the defendant's sole purpose in engaging in the challenged conduct was to injure them.  Rather, they had alleged the defendant had a profit motive for promoting the off-label use of its products.

The court similarly dismissed the "aiding and abetting" causes of action.  There is no such cause of action for aiding and abetting fraud under Pennsylvania law.  And in New Jersey, to the extent there is one, the aidor and abettor must be supporting the commission of an underlying tort, which the court held was not properly pled in the amended complaint.  Slip op. at 28.

Finally, the court rejected plaintiffs' unjust enrichment claims.  First, it noted that unjust enrichment is not a substitute for a tort claim, and where there is no underlying tort, there can be no unjust enrichment.  Second, the court observed that there was no direct relationship between the manufacturer and the plaintiff-patients, making this a particularly inappropriate instance in which to create quasi-contract liability.

Notably, the court rejected plaintiffs' request for leave to amend the complaint.  It observed that plaintiffs already had amended the complaint after the defendant filed the first motion to dismiss.  Indeed, they added over 140 pages to the complaint, to bring it to a whopping 178 pages.  Moreover, the court concluded there simply was nothing more plaintiffs could add that would give rise to a claim.

The Zafarana decision is an important reminder that just because a manufacturer may settle a qui tam claim with the government, that does not automatically mean that the manufacturer should be subject to civil liability in a class action.  In such situations the individual claims still deserve close scrutiny.  Where, as in Zafarana, they fail to causally connect any harm to the alleged misconduct, they should be dismissed.

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This seems to be turning into food and beverage week at Ye Olde Consumer Class Actions Blogge.  First, we had our Tort Twits suing Yoo-hoo out the ying-yang.  And now these two decisions, which demonstrate a judicial willingness -- even on a motion to dismiss -- to employ some common sense and dismiss claims that obviously fail to plead a plausible fraud.

The first decision -- Werberl v. Pepsico, Inc., 2010 WL 2673860 (N.D. Cal. July 2, 2010) -- was covered earlier this week by Sean Wajert over at Mass Tort Defense.  I won't completely rehash the case here, other than to note that Werberl is an excellent example of a jurist who does not feel compelled to check her brain at the door when adjudicating Rule 12 motions.  In Werberl, plaintiff alleged that the packaging for Cap'n Crunch's Crunch Berries cereal -- which is delicious and was a favorite of mine growing up -- is deceptive because the name and the pictures lead one to believe that it has actual berries in it when it does not.  Of course, anyone who has ever seen a box of Crunch Berries knows that this allegation is pure horse puckey.  (As does anyone who has actually tasted the cereal.)

Many judges faced with such a ridiculous theory still might hesitate to dismiss such claims pled under California's pro-plaintiff Unfair Competition Law, Consumer Legal Remedies Act, and False Advertising Law.  They might be tempted to allow some discovery, or say the theory presents a jury question.  But not Judge Saundra Brown Armstrong!  She began her analysis by noting that although the question whether a business practice is deceptive is generally a question of fact not suitable for resolution in a motion to dismiss, "where a court can conclude as a matter of law that members of the public are not likely to be deceived by the product packaging, dismissal is appropriate."  Id. at *3.

She then looked to the facts pled in the putative class action to conclude as a matter of law that there was no deception here:

[T[here are no pictures or images of any berries or any other fruit depicted on the Cap'n Crunch cereal box.  Nor are there any representations that the cereal is made with real fruit or is nutritious.  Rather, the Crunch Berries -- which are not fruit -- are described as a "SWEETENED CORN & OAT CEREAL" and shown as brightly-colored balls of cereal that no reasonable consumer would believe are made from real berries. . . . [T]here simply is nothing in the Cap'n Crunch packaging that would lead a reasonable consumer to believe that the brightly-colored cereal balls depicted on the product cover and described as Crunch Berries are, in fact, made or derived from berries or fruit.

Id. at *4.  Accordingly, the court dismissed the UCL, CLRA, and FAL claims.  It also dismissed the intentional misrepresentation claims for lack of a misrepresentation and because any reliance by the consumer to conclude that the cereal had real berries would be unreasonable per se.  The court also dismissed the breach of express and implied warranties as frivolous because there was no express or implied representation on the packaging that Crunch Berries contain real fruit.  The court even refused to grant leave to amend the complaint because no amendment could cure the fact that the packaging was not deceptive as a matter of law.

Judge Armstrong's analysis is an excellent example of a court that -- faced with a motion to dismiss a ridiculous claim -- was not hamstrung by the rules to avoid applying basic common sense to a consumer fraud claim.  We need more judges like that.

The second opinion I wanted to share in today's post was Mason v. The Coca-Cola Co., 2010 WL 2674445 (D.N.J. June 30, 2010).  In Mason, the plaintiffs brought a putative nationwide class action against Coca-Cola alleging that Diet Coke Plus was misleading under federal and state law because "'the term "Plus" connotes a more robust amount of vitamins and minerals in the product when, in fact, that was not the case at all.'"  Id. at *1.

The defendant began by invoking the primary jurisdiction doctrine and federal preemption to dismiss the claims.  The court wasn't buying it.  As for primary jurisdiction, the court concluded that the lawsuit asked the court to do what courts routinely do:  apply federal regulations.  Indeed, the court said that "[a]t its heart, this case calls for the determination of whether Plaintiffs received what they bargained for."  Id. at *2. 

The court also rejected the defendant's express preemption and conflict preemption arguments.  It quickly dispatched the express preemption argument, reasoning that plaintiffs were simply seeking a state law remedy for a violation of federal labeling requirements, and this was not expressly preempted by the Food, Drug and Cosmetics Act.  As for conflict preemption, the defendant argued that the FDA had established a regulation defining use of the term "Plus," and if the state law claim were allowed to proceed, it might result in a conflicting definition.  The court strongly rejected this argument, reasoning:

Were the Court to permit the application of implied conflict preemption in this case, it would turn regulatory definitions such as 21 C.F.R. sec. 101.54(e) into suits of armor capable of immunizing parties who mislead the public from any potential civil liability, even before it is determined whether the party complied with the definition.  Congress could not have intended such a perverse result when it granted the FDA authority to regulate in this area.

Id. at *4.

But once the court moved to an analysis of plaintiffs' causes of action, it applied basic common sense to conclude that plaintiffs had failed to plead consumer fraud.  In analyzing the claim under the New Jersey Consumer Fraud Act, the court noted that plaintiffs must plead:  (1) unlawful conduct, (2) an ascertainable loss, and (3) a causal relationship between the two.  The court began its analysis by observing that although plaintiffs say that the term "Plus" connoted more vitamins and minerals than were actually in the product, the actual amount of added vitamins and minerals were listed on the product itself.  Indeed, a warning letter sent by the FDA to defendant, which was attached to the complaint, indicated that:

the ingredient list includes the following added vitamins and minerals:  magnesium sulfate (declared at 10% of the Daily Value (DV) for magnesium in the Nutrition Facts panel), zinc gluconate (declared at 10% of the DV for zinc), niacinamide (declared at 15% of the DV for niacin), pyridoxine hydrochloride (declared at 15% of the DV for vitamin B6), and cyanocobalamine (declared at 15% of the DV for vitamin B12).

Id. at *6.  In light of these disclosures right on the product, the court held that plaintiffs had failed to allege with particularity what further expectations they had for the product or how it fell short of such expectations.  Thus, they had failed to plead the first element of an NJCFA claim. 

The court held that they also failed to plead the ascertainable loss element of such a claim because they do not plead how what they received was of a lesser value than what they were promised.  They bought a tasty beverage, they drank a tasty beverage.  They don't allege that they paid more for it than other beverages.  And they don't allege that they would not have bought the Diet Coke Plus but for the allegedly fraudulent misrepresentations.  Thus, they failed to plead an ascertainable loss under the NJCFA.  Id. at *6-*7. 

The court held that, for the same reasons, plaintiffs failed to state a claim for negligent or intentional misrepresentation.  Id. at *7.  And it dismissed plaintiffs' unjust enrichment claim because New Jersey does not recognize unjust enrichment as a separate tort cause of action, and where the underlying tort claims fail, the unjust enrichment claim should be dismissed as well.  Id.

Unlike the court in Werberl, the court in Mason gave plaintiffs an opportunity to re-plead their claims.  But given the fact that the added vitamins and minerals were fully disclosed on the Nutrition Facts section of the product label, plaintiffs will have a very difficult time pleading anything that could give rise to a fraud or misrepresentation claim.

Taken together, Werberl and Mason provide strong encouragement for courts to throw out consumer fraud claims where the contents of the food or beverage product are apparent from the product's packaging and labeling.

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As I've noted before, when a medicine is withdrawn from the market, the people who allegedly were physically injured by it are hardly the only litigants trying to put their hands in the defendant's "deep" pockets.  Often, the people who took the medicine and suffered no physical harm sue for so-called "diminished value" of the medicine they took.  And increasingly states are getting into the game, claiming that they would not have paid for the medicine through their Medicaid programs if they had only known what they know now. 

Yesterday the MDL judge presiding over the Vioxx litigation issued his findings of fact and conclusions of law in a bench trial of the State of Louisiana's claims.  The court's opinion is a strong reminder that although a state can make all sorts of claims about what it would have done, it must actually prove loss causation to prevail on its claims.  Where the state cannot establish that it would have acted differently if it had different knowledge, then its claims must fail for lack of causation.

In State of Louisiana v. Merck & Co., Case No. 05-3700, Slip op. (E.D. La. June 29, 2010), Louisiana had sued on a variety of theories seeking to recover the money it spent reimbursing for Medicaid prescriptions for Vioxx -- the COX-2 pain medicine that Merck had withdrawn from the market amid allegations that it caused cardiovascular problems.  The district court had granted summary judgment on the state's claims for unjust enrichment and violations of the Louisiana Unfair Trade Practices Act and the New Jersey Consumer Fraud Act.  The only claim left was Louisiana's claim for redhibition.

Redhibition requires that:  (1) the product was worthless or would not have been bought had plaintiff known of the alleged defect, (2) that the plaintiff did not know of the alleged defect, which existed at the time of purchase, and (3) the defendant was given the opportunity to repair.  In a 40-page opinion, the district court reviewed the testimony and evidence and concluded that the state could not prove causation.  Specifically, the state "did not establish at trial that:  had it known the different facts about Vioxx, (a) the State could have established an exclusive formulary; (b) and the State would have established such a formulary and excluded Vioxx from it."  Slip. op. at 38. 

The court conducted an extensive analysis of the state's Medicaid program and observed that the state had no ability to make independent decisions about various medicines that were federally approved for much of the time-period covered in the Complaint.   Moreover, once it started to act on the issue, the legislature's conduct established that it would not have adopted a formulary that would have allowed it to exclude Vioxx from payment.

The opinion also contains an extensive discussion of the scientific developments in the field of Cox-2 inhibitors, the development of the labeling, and a description of how the company that advised the state on its formulary made its decisions -- including that it did not rely on marketing materials, internal pharmaceutical company e-mails, or pharmaceutical companies' formulary dossiers to make decisions about what medicines to cover.

The decision in this case serves as a strong reminder that even states must not be excused from actually proving the basic elements of their claims, including causation.

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Who knew that not everyone loved Zipcar?  Since the company burst onto the scene about a decade ago, it has spawned a group of almost cult-like devotees who seemingly can't shut up about the company.

For those of you who don't live in urban areas and have no idea what I'm talking about, here's the deal.  Lots of city dwellers spend years -- even decades -- of their lives not owning a car.  (Even I did.  Although now I have 2.  Go figure.)  Generally, these carless city folk get around just fine on subways, buses, taxis and bicycles.  But there are some errands -- like going to Costco to stock up for the party you are throwing, or picking up that sofa you bought on Craig's list, or a trip to Ikea -- that just cry out for a car.  But renting a car in the city can be a real pain in the tucchus.  First of all, it's expensive.  Car rental can be $200 or more in Manhattan.  And you have to rent the car for an entire day.  And then there's the fact that the car rental places are not conveniently located.

Enter Zipcar.  By paying an annual fee to join Zipcar, you "co-own" cars that are sprinkled in parking garages throughout the city.  You can schedule use of a Zipcar in increments as small as an hour, which makes taking a car on an errand very affordable.  Zipcar relies on its members to keep the cars clean and gassed for subsequent users.  And, as you can imagine for a company that schedules car use by the hour, it is very concerned about the timely return of a Zipcar.

People who use Zipcars tend to speak glowingly about them.  They throw around terms like "convenient," "affordable," and "environmentally responsible."  Try not to get trapped by one of them at a cocktail party.

Imagine my surprise to find a class action opinion in a case against Zip Car!  See Blay v. ZipCar, Inc., 2010 WL 2292467 (D. Mass. June 7, 2010).  It seems that for at least one two-year member of Zipcar, the luster is off the pearl.  He alleged that under Zipcar's membership contract, there were five types of charges added onto the hourly charges that were unfair and unlawful.  Those five charges were:

1.  If members make or alter reservations by speaking to a live operator rather than using the Internet or an automated phone system, they are charged $3.50.

2.  If Zipcar must process a parking or traffic ticket, it charges the member an automatic fee.

3.  If a Zipcar is returned late, there are escalating fees (starting at $50) that are charged regardless of whether someone else is waiting for the vehicle.

4.  If a member forgets property in the car, he must retrieve it within 3 hours, attempt recovery through an online lost and found, or reserve the car for an hour to retrieve it.

5.  If a member's account is inactive, he is charged $20 per month if he has money on account; if he has no money on account, his membership may be terminated.

The plaintiff alleged that these fees were penalties not associated to any actual costs to Zipcar, and he sought to recover them for a nationwide class on causes of action for unjust enrichment, money had and received, and declaratory judgment.

Not surprisingly, Zipcar moved to dismiss.  The district court -- applying Twombly and Iqbal -- granted the motion without prejudice.

First, the court held that it could properly consider the membership agreement and terms on the website, both of which were referenced in plaintiff's complaint.  It also allowed into evidence on the motion to dismiss an e-mail from plaintiff and Zipcar's standard operating procedures.

The defendant argued that these charges were not in the nature of liquidated damages at all, but were instead alternative ways in which plaintiffs could perform their obligations under the membership agreement.  The court generally seemed somewhat dubious of the alternative performance argument, observing that "[t]he concept of an alternative performance contract has been largely absent from Massachusetts case law for over the past century and Zipcar's memorandum contains numerous citations to other jurisdictions and to Massachusetts cases from the 1920s or earlier."  Id. at *3.

Nevertheless, when the court looked at the $3.50 fee to speak to a live operator, it held that "it represents a clear alternative performance term" that is based in the cost to Zipcar of providing a live representative to speak to.  The court thus dismissed the challenge to this fee without prejudice.

As for the late fees, the court reasoned that plaintiff had not met his burden of pleading that they were unenforceable penalties grossly disproportionate to Zipcar's costs.  Id. at 5.  It observed that Zipcar had a legitimate reason for encouraging members to return cars on time, and it noted that members could avoid the penalties simply by extending their reservation by a half hour  or more at the normal hourly rates.  The court thus dismissed the challenge to this fee without prejudice.

The court next analyzed the fee for Zipcar to process traffic tickets.  The court noted that plaintiff failed to provide any evidence -- other than threadbare allegations -- that the fee is grossly disproportionate to Zipcar's cost.  Moreover, Zipcar established that it must pay people to process the traffic tickets.  Accordingly, the court dismissed the challenge to this fee without prejudice.

Similarly, the court held that plaintiff failed to plead how the fee for lost items was unfair and disproportionate.  Moreover, Zipcar allowed less costly means of obtaining the goods.  The court thus dismissed the challenge to this fee, too, without prejudice.

The court refused, however, to dismiss the challenge to the "inactivity fee," at least initially, reasoning:

With respect to these fees, Blay's argument is colorable.  In particular, the Court is unpersuaded that an inactive member costs Zipcar anything at all, let alone $20 per month, and Blay is correct that the clear motive seems to be to induce customers to maintain active memberships.  Although it is still unclear whether the charges might prove to be enforceable penalties and plaintiff's pleading is again cursory, the Court finds that the allegations related to inactivity fees are sufficient to state a cause of action and survive a motion to dismiss.

 Id. at *7.

But not so fast!  The defendant argued that plaintiff did not actually pay an inactivity fee, and thus did not have standing to bring such a claim.  The court agreed:  "Because he does not explicitly allege that he incurred such a fee, he cannot represent a putative class based only upon that claim.  His claim based upon the inactivity fee will, therefore, be dismissed as well."  Id. at *8.

The defendant had raised other strong arguments against plaintiff's causes of action.  For example, it argued that plaintiff could not seek recovery in "quasi contract" for unjust enrichment where the claims were governed by written, explicit contracts.  Similarly, the defendant asserted the voluntary payment doctrine as a bar to recovery.  (Regular readers remember the voluntary payment doctrine holds that a consumer's voluntary payment of a disclosed fee that was made without fraud, concealment or compulsion cannot form the basis of a subsequent claim to recover those payments.  Because the court could decide the case without reaching these arguments, it did not rule on them.  But they provide additional support for the result in this case, and they should tend to discourage plaintiff from attempting to amend his complaint to re-assert the causes of action that he had pled.

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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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AstraZeneca recently got rid of a bad case of heartburn it has had since 2005.  In Pennsylvania Employee Benefit Trust Fund v. Zeneca, Inc., No. 05-075-ER, Slip op. (D. Del. May 6, 2010), some union health benefit funds and other third party payors -- as well as some individual consumers -- had sued the company in a putative class action for consumer fraud, unjust enrichment and negligent misrepresentation.  Originally, the defendants were successful in having the case dismissed on preemption grounds.  But the U.S. Supreme Court's decision in Wyeth v. Levine changed that, and so the defendants once again moved to dismiss -- this time arguing that the complaint failed to state a claim as a matter of law.

Plaintiffs' theory of the case was simple.  They alleged that as defendants' Prilosec was going off patent and becoming available in cheaper generic form, defendants obtained FDA approval for Nexium, which -- plaintiffs alleged -- was basically the same thing as Prilosec.  Nexium was no more effective than Prilosec, they argued, but the defendants' marketing campaign caused people to buy the more expensive Nexium rather than generic Prilosec because they were misled into thinking Nexium was more effective.

The court engaged in an extensive choice-of-law analysis.  Plaintiffs argued that Delaware law should apply because defendants were Delaware corporations.  Defendants argued that the law of plaintiffs' home states should apply:  Pennsylvania, New York, and Michigan.  The court employed a two-part analysis, determining first whether there was any real conflict between the states' laws on each cause of action, and then employing Delaware's "most significant relationship" test.

For the consumer fraud statute cause of action, the court found that there was a real conflict between Delaware's statute and the other states' statutes.  Delaware does not require reliance or causation, the court said.  Pennsylvania requires justifiable reliance.  New York requires at least causation.  And Michigan requires proof that the purchase was by a consumer for personal or home use.

The court then analyzed which state had the most significant relationship, referring to Restatement (Second) of Conflicts of Laws sections 6, 145, and 148.  The court refused to apply section 148(1), concluding that the representations were not made in each state, but rather emanated out of Delaware.  Slip op. at 18.  Instead, the court applied section 148(2).  Nevertheless, the court concluded that the law of the plaintiffs' home states governed.  Relying on comment j to section 148, the court found that, for the Pennsylvania plaintiffs, "Pennsylvania law controls in that this is the forum where each Plaintiff relied upon the alleged misrepresentations by buying Nexium, as well as the place where (a) the alleged misrepresentations were received and (b) each Plaintiff's residence or place of business is located."  Id. at 22.

The court held that states of plaintiffs' residence had at least as strong an interest in protecting consumers located within their own jurisdictions from deceptive commercial practices.  And it noted that applying the law of the plaintiff's home better protected the expectation of the parties.  Indeed, the court held that plaintiffs could not have had a justified expectation that the law of the defendant's residence would control:

Certainly, it could not upset these Plaintiffs' expectations to apply the law of their home state as their only justified expectation would be for an opportunity for redress under the laws of their own jurisdiction.  Stated differently, these Plaintiffs would not be justified in expecting Delaware law to apply to their claims when purchasing Nexium in Pennsylvania.

Id. at 25.

Accordingly, the court applied the consumer fraud statute of each plaintiff's home state to his or her claims.

As for the unjust enrichment and negligent misrepresentation causes of action, the parties had not briefed any differences in the laws.  Finding no actual conflict, the court determined to analyze those claims using Delaware law and the law of the plaintiff's home state interchangeably.

In analyzing whether plaintiffs had stated a claim under their home states' consumer fraud statutes, the court observed that the amended complaint was seriously lacking in factual allegations about reliance and causation.  See id. at 43 ("the Amended Complaint is devoid of any allegations showing that Plaintiffs . . . relied upon, or even were aware of, the [physician directed] Marketing and/or [direct-to-consumer] Advertising campaigns which form the basis for these Plaintiffs UTPCPL claims").  As for the New York plaintiff, the court said that he must at least have pled that he was aware of the advertising and marketing campaigns in order for there to be the necessary causation under New York law.  Id. at 45.  But he did not.

The court even noted that the very logic underlying the complaint -- that "customers had to pay inflated prices for what they thought was a superior product" -- presupposes some knowledge about the alleged false advertising and marketing.  And yet it was completely unsupported by any plaintiff-specific allegations about knowledge, reliance, or causation.  Accordingly, the court dismissed the statutory consumer fraud claims.

There was one Michigan plaintiff, who was the state insurance commissioner standing in the shoes of an insolvent third party payor, The Wellness Plan.  As "Rehabilitator" of The Wellness Plan, the commissioner was seeking to collect and liquidate the plan's assets.  Under Michigan law, however, the consumer fraud statute only applies to consumers -- not businesses.  After analyzing Michigan law, the court explained that it "must decide whether the Wellness Plan's role as a third party payor ("TPP") rendered it a 'mere conduit or intermediary' for its participants' use of Nexium or whether it purchased Nexium principally to engage in its own commercial enterprise."  Id. at 51.  The court concluded that the amended complaint failed to give it sufficient information to make that determination.  Thus, it dismissed the claim with leave to replead.

As for the unjust enrichment claim, the court cited one of the "remoteness" decisions from tobacco litigation:  Steamfitters Local Union No. 420 Welfare Fund v. Philip Morris, Inc., 171 F.3d 912 (3d Cir. 1999).  In this context, the court reasoned, the unjust enrichment claim is just another way of stating a classic tort claim.  Thus, where the plaintiff -- on the classic tort claim -- "cannot establish proximate cause due to the remoteness of the injuries in relation to the defendant's wrongful conduct," the unjust enrichment claim also should be dismissed just like the classic tort claim.  Id. at 54.

Finally, as to the negligent misrepresentation claim, the court observed that justifiable reliance is an element of the claim under each state's law.  But the amended complaint had no allegations of reliance or causation for any individual plaintiff, let alone allegations establishing that such reliance was justifiable.  Accordingly, the cause of action was dismissed.

Despite the length of time the case had been pending and the opportunities plaintiffs had had to amend their claims, the court allowed plaintiffs another opportunity to replead.  This was primarily due to the fact that the issues that had been on appeal were completely different from the issues raised in defendants' motion to dismiss.

Nevertheless, the court's opinion makes it clear that plaintiffs have a high hurdle to plead reliance and causation in this litigation.

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This is the kind of decision that causes lawyers to write paragraphs like those hideous releases in settlement agreements that go on for pages and have more commas, semicolons and parentheses than a Costco-sized Barrel of Monkeys.

By this point, everybody who has an Internet browser already knows what click fraud is.  Internet advertising often is priced by how many people "click" on an ad's link and travel to the advertiser's website.  Competitors, hooligans, and other cyber-rapscallions have developed programs to generate numerous clicks on such ads, thereby driving up the cost of the ads.  Many sites that host advertising have gone to extraordinary lengths to develop software to detect click fraud and thereby protect advertisers on their sites.  There have been many class action lawsuits regarding "click fraud," including settlements.

Along comes a website that is sort of popular -- Facebook.  It's not locked in the Stone Ages; it has heard of click fraud.  And so it decides to eliminate the possibility of future "click fraud" class actions by its advertisers by including within it's terms and conditions the following disclaimer:

I . . . UNDERSTAND THAT THIRD PARTIES MAY GENERATE IMPRESSIONS, CLICKS, OR OTHER ACTIONS AFFECTING THE COST OF THE ADVERTISING FOR FRAUDULENT OR IMPROPER PURPOSES, AND I ACCEPT THE RISK OF ANY SUCH IMPRESSIONS, CLICKS, OR OTHER ACTIONS.  FACEBOOK SHALL HAVE NO RESPONSIBILITY OR LIABILITY TO ME IN CONNECTION WITH ANY THIRD PARTY CLICK FRAUD OR OTHER IMPROPER ACTIONS THAT MAY OCCUR.

Seems straightforward, right?  And if some numskull were to actually sue Facebook for click fraud with this HUGE disclaimer in his contract, you would expect a court to immediately throw him out on his tuchus, right?

Not in California.

See In re Facebook PPC Advertising Litigation, Case Nos. 5:09-cv-03043-JF, 5:09-cv-03519-JF, 5:09-cv--03430-JF, Slip op. (N.D. Cal. Apr. 22, 2010).

Three plaintiffs who agreed to Facebook's terms and conditions and became advertisers on Facebook's website brought a class action against Facebook alleging that they had been charged for "invalid clicks" and "fraudulent clicks."  The complaint attributed these clicks to:  "'(a) technical problems; (b) system implementation errors; (c) various types of unintentional clicks; (d) incomplete clicks that fail to open the advertiser's web page; and (e) improperly recorded or unreadable clicks originating in some cases from an invalid proxy server or unknown browser types.'  The complaint describes 'click fraud' as the 'result of a competitor clicking on an advertiser's ad in order to drive up the cost of an ad or deplete the competitor's budget for placing ads.'"  Slip op. at 3 (quoting complaint).

Not surprisingly, Facebook moved to dismiss the complaint for failure to state a claim, pointing to its GIGANTIC DISCLAIMER.

In analyzing the breach of contract count, the court analyzed whether the contract language was ambiguous and susceptible to the plaintiffs' interpretation.  The court held that the agreement was unambiguous in disclaiming liability for third party click fraud.  Slip op. at 6.

BUT . . . the court held the disclaimer:

may be ambiguous with respect to whether it covers only "click fraud and other improper actions" by "third parties".  Plaintiffs claim that they have been charged for "invalid clicks" that are the result of Defendant's own conduct. . . . [The invalid clicks described in the complaint] arguably need not be fraudulent, improper, or the result of actions of third parties.

Slip op. at 6-7.

Thus, the court dismissed the breach of contract count to the extent it related to "click fraud" performed by third parties, but it refused to dismiss the breach of contract count to the extent it relied on Facebook's failure to prevent so-called "invalid clicks."  The court dismissed the claim for breach of the implied covenant of good faith and fair dealing because the statements in the complaint did not go beyond a mere breach of contract, and thus the implied covenant may be "disregarded as superfluous."  And it dismissed the unjust enrichment claim because there was an adequate remedy at law.

As for the Unfair Competition Law count, the court once again split the baby, allowing the claim to proceed for so-called "direct injury" claims against Facebook, but holding that the third party click fraud allegations failed to state a claim.  California's UCL has three prongs:  fraud, unlawfulness, and unfairness.  The court held that plaintiffs could not allege reliance sufficiently to maintain the fraud prong of the UCL.  But it determined that -- with respect to "direct injury" claims -- plaintiffs' allegation of systematic breach of contract met the unlawful conduct prong of the UCL.  Moreover, it held that the "unfairness" prong was met, borrowing the FTC's standard for unfairness in 15 U.S.C. sec. 45(n).  (This, of course, is inconsistent with other California precedent requiring a violation of a legislatively-announced policy in order for conduct to be "unfair.")

The bottom line is this:  despite a disclaimer that very clearly absolved Facebook of responsibility for clicks driving up the cost of advertising, a finding of some "ambiguity" in the provision will allow the claim  to proceed to costly class action discovery.  The lesson to lawyers is that in drafting disclaimers, one must make it doubly and even triply clear that under no conceivable set of circumstances is the client to be responsible for what is disclaimed.  The challenge -- particularly in light of opinions like this one -- is to do that with simple, crisp language, and resist the urge that such opinions create to add every conceivable synonym and scenario to the disclaimer.  Ironically, doing the latter may increase the likelihood of a court finding ambiguity.

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Regular readers will remember that in February I posted about a decision from U.S. District Judge Dennis Cavanaugh from New Jersey, in which he was faced with a putative class action alleging economic harm from the inclusion of trace amounts of certain chemicals in baby shampoo and other cosmetics.  On April 15, Judge Cavanaugh ruled in a similar case brought by residents of New Jersey and Kentucky.  Once again, the court dismissed most of the claims.  Crouch v. Johnson & Johnson Consumer Companies, Inc., 2010 WL 1530152 (D.N.J. Apr. 15, 2010).

The court began with the issue of standing.  It held that mere allegations that a chemical was included in a product -- without more -- was not enough to create constitutional standing to sue.  Citing Williams v. Purdue Pharma Co., 297 F. Supp. 2d 171 (D.D.C. 2003), the court observed that without alleging that a product failed to perform as advertised, the plaintiff has received the basis of his bargain and has no economic injury.  2010 WL 1530152 at *4.  The court concluded that -- with the exception of those products alleged to actually contain chemicals that the Food and Drug Administration has banned from use in cosmetics -- the plaintiffs lacked standing to sue.  In doing so, the court winnowed the products involved down to J&J's Baby Shampoo and Wal-Mart's Equate Tearless Baby Wash.

The court then proceeded to the Rule 12(b)(6) motions.  With respect to the New Jersey plaintiff, the court held that New Jersey's Product Liability Act applied to plaintiff's claims, and the PLA superseded all other causes of action.  Plaintiff's attempt to plead around the PLA by seeking only economic damages made no difference; the case was still governed exclusively by the PLA, and plaintiff has been unable to state a claim.

With respect to the Kentucky plaintiff, the court held that Kentucky law -- rather than New Jersey law -- applied.  Moreover, the court held that Kentucky's court of appeals appears to have taken the exact opposite approach to the interaction between the state's Product Liability Act and Consumer Fraud Act.  Thus, the court concluded, the "expansive reach of the Kentucky [Consumer Protection Act] appears to encompass and allow the assertion of products liability/personal injury tort claims."  2010 WL 1530152 at *9.  Accordingly, the Court refused to dismiss the consumer fraud act claims.

The court also upheld the Kentucky plaintiff's breach of warranty claims under the [mistaken] belief that state warranty law is "uniform."  Id. at *10.  But see Compaq Computer Corporation v. LaPray, 135 S.W.3d 657 (Tex. 2004) (state express warranty law differs across the country).

But the court dismissed the Kentucky plaintiff's unjust enrichment claim, because plaintiff failed to plead that he suffered any injury that is not adequately remedied by an action at law.

The court's partial grant of defendants' motion to dismsiss was without prejudice.  I will continue to monitor the litigation and keep you posted regarding developments.

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The Fourth District of California's Court of Appeal recently issued an important opinion affirming a demurrer on a UCL claim, holding that the "actual reliance" requirement of In re Tobacco II applies to claims brought under the "unlawful" prong of the UCL where they are grounded in deception or misrepresentation.

In Durrell v. Sharp Healthcare, No. D054261, Slip op. (Cal. App. -- 4th Dist. Apr. 19, 2010), the plaintiff had been admitted to the defendant's hospital five times for treatment.  Plaintiff alleged that Sharp billed uninsured patients wildly inflated rates called "Chargemaster rates" for services, while it billed patients covered by Medicare and private insurance substantially less.  For example, plaintiff alleged, Sharp allegedly charged uninsured patients 412% of the Medicare reimbursement rates for typical reimbursements.  Slip op. at 4.  Plaintiff alleged that this violated the Agreement for Services, which only obligates a patient to pay Sharp's "usual and customary charges for . . . services."  Slip op. at 2-3.  Plaintiff asserted causes of action under the UCL, the Consumer Legal Remedies Act, breach of contract, breach of the duty of good faith and fair dealing, and unjust enrichment.  The trial court had granted the defendant's demurrer, finding primarily that the Second Amended Complaint ("SAC") failed to adequately allege causation.

The court in Durrell traced the history of Proposition 64, which limited standing to sue to those who suffered an injury in fact as a result of the defendant's challenged conduct.  The purpose of this restriction "'was unequivocally to narrow the category of persons who could sue businesses under the UCL."  Slip op. at 8.  This was done to eliminate incentives that encouraged the filing of frivolous lawsuits that clog California courts and threaten the very survival of small businesses. 

The question, of course, is what does the phrase "as a result of" mean in the context of each of the three prongs of the UCL.  (The UCL precludes fraud, "unlawful" conduct, and "unfair" conduct.  Plaintiff had dropped his claim under the fraud prong of the UCL on appeal, leaving only "unlawful" and "unfair" conduct.)

Last summer, in a seminal opinion, the California Supreme Court determined that -- within the context of the UCL's "fraud" prong -- the requirement that injury be "as a result of" the fraudulent conduct actually meant that the plaintiff must have actually relied on the misstatement; no lesser standard would satisfy the purpose of Prop. 64.  See Slip op. at 12-13 (discussing In re Tobacco II).

But what did "as a result of" mean here, where the plaintiff alleged that the defendant violated the "unlawful" prong of the UCL by making false promises to provide affordable health care and instead charging unreasonable and inflated prices"?  Slip op. at 12.

The Court of Appeal held that it meant "actual reliance," just as in In re Tobacco II:

[W]e conclude the reasoning of Tobacco II applies equally to the "unlawful" prong of the UCL when, as here, the predicate unlawfulness is misrepresentation and deception.  A consumer's burden of pleading causation in a UCL action should hinge on the nature of the alleged wrongdoing rather than the specific prong of the UCL the consumer invokes.  This is a case in which the "concept of reliance" unequivocally applies, and omitting an actual reliance requirement when the defendant's alleged misrepresentation has not deceived the plaintiff "would blunt Proposition 64's intended reforms."

Id. at 14 (citations omitted).

Because the complaint did not allege that the plaintiff relied on Sharp's website or the language in the Agreement for Services, there simply was no causation credibly pled, making the trial court's demurrer proper.

The court proceeded to analyze the "unfair" prong of the UCL.  Plaintiffs said that his allegation that Sharp's conduct was "unfair, immoral, unethical, oppressive and unscrupulous" satisfied the UCL.  The Court of Appeal disagreed, holding that this was a "vague test of unfairness" that must be rejected.  The court outlined the debate in California law regarding whether Cel-Tech applies in consumer cases or not, and ultimately concluded that a complaint that is not "tethered to any underlying constitutional, statutory or regulatory provision, or . . . threatens an incipient violation of antitrust law" cannot satisfy the "unfairness" prong of the UCL in a consumer fraud case.

The court sustained the demurrer on the CLRA count for lack of causation:  the complaint "does not allege Durell relied on any representation by Sharp in seeking or accepting treatment at its facility."  Slip op. at 20.

The breach of contract and breach of implied covenant counts failed because plaintiff failed to plead that he performed his allegations under the contract.  Rather, he was trying to escape paying even the reasonable value for the services he received.  Id. at 20-24.  And the unjust enrichment count was dismissed because the complaint pleads the existence of express contracts, which must govern here. 

Durell is an important opinion demonstrating the restrictive standard by which California courts will judge standing in UCL claims brought under the "unlawful" and "unfair" prongs of the UCL in the wake of Proposition 64.

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By now the scenario has become formulaic:  a pharmaceutical company is alleged to have promoted certain medicines for "off-label" uses, i.e., to treat conditions that are not indicated on the FDA-approved label.  The patients who took the medicines don't sue; rather, the "Third-Party Payors ("TPPs")" who paid for the prescriptions sue, claiming that they would not have paid for the prescriptions (or would have paid less for them) but for the pharma company's promotion of the medicines for off-label use.  These cases are routinely dismissed on the pleadings as failing to state a claim.

Central Regional Employees Benefit Fund v. Cephalon, Inc., 2010 U.S. Dist. LEXIS 29677 (D.N.J. Mar. 29, 2010), is no exception.  In this case, local government health and welfare benefit funds sued Cephalon over a variety of medicines that it purportedly promoted for off-label use:  Provigil (which treats narcolepsy), Gabitril (which treats seizure disorders), and Actiq and Fentora (which manage cancer pain in opiod-tolerant patients with malignancy).  Plaintiffs sought to represent a nationwide class of "'all governmental entities in the United States of America who have been caused to expend monies for Provigil, Gabitril and Actiq as a result of the off label promotion by the defendants.'"

(Frequent readers will note that the class definition is a failsafe class:  it requires a determination of the merits in order to determine who is in the class.  The court, unfortunately, does not take up this issue.)

The court dismissed the complaint pursuant to Rule 12(b)(6) for failure to plead a cognizable claim.  Its overall criticism of the complaint was that it was "yet another legally unsupportable attempt to bring a private cause of action against Cephalon for its 'misbranding' and off-label promotion violations of the Federal Food, Drug and Cosmetics Act ("FDCA") and implementing regulations."  Id. at *17.  The FDCA does not create a private right of enforcement; rather, it is enforced by the FDA.  It allows doctors to prescribe medicines for uses not approved by the FDA, but FDA regulations restrict pharmaceutical companies' right to promote such unapproved uses to doctors.  The U.S. Supreme Court recognized in Buckman, however, that off-label use of medicines is part of standard medical care, and courts -- like the court in Cephalon -- repeatedly recognize that "off-label promotion" that may be restricted by FDA regulations is not inherently false or misleading.  See 2010 U.S. Dist. LEXIS 29677 at *9 (citing cases).  The court in Cephalon held that plaintiffs could not sue to enforce any violations of FDA regulations, and yet they had not adequately pled any actual cause of action for fraud.

Indeed, the court dismissed the claim under New Jersey's RICO statute because plaintiffs failed to allege fraud with particularity.  It noted that even an allegation that the defendant paid for studies did not mean that the studies were actually fraudulent.  The plaintiffs' error -- as is so often the case in these cases -- is that they failed to connect any generic allegation of so-called fraud to a particular doctor or prescription at issue.  Id.  Interestingly, the court noted that the plaintiffs did not even allege that the medicines their plan members took were ineffective for the off-label uses for which they were prescribed.  Id. at *10.

The court dismissed the fraudulent concealment and "illegal common law fraud" counts for the same reasons.

Plaintiffs also pled that favorite of Hail Mary counts:  Unjust Enrichment.  This, of course, is a theory of recovery in quasi contract.  It just doesn't fit in the scenario where a purchaser buys and actually receives a product; it is more suited for the "incomplete performance" scenario.  The court held that where, as here, unjust enrichment is pled accompanying traditional tort causes of action, the claim must be dismissed if the traditional tort claims are dismissed for lack of proximate cause.

The opinion in Cephalon does not really break new ground, but it is yet another strong decision indicating that so-called "third-party payor" claims lack merit.

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I really thought it would be more difficult to find a subject for this second "Torts Twits" feature.  But then this complaint landed in my lap, and I knew I had April's award winners.

I don't know who the bright light was behind this dim-witted lawsuit, so I won't single out any one of the gaggle of lawyers with their names on the complaint.  But they come from these firms:  Cohn Lifland Pearlman Herrmann & Knopf LLP in Saddle Brook, NJ; Wolf Popper LLP in NYC; and Clark, Hunt, Ahern & Embry in Cambridge, MA.

And what, pray tell, is the consumer fraud that is so important that these lawyers have made a federal case of it?  Breyer's Smooth & Dreamy Ice Cream proclaims on its label that it contains one-third fewer calories than "regular ice cream," but it apparently does not contain one-third fewer calories than the corresponding flavor in Breyer's All Natural Original Brand.

Now get this straight:  plaintiffs are not saying that the ice cream fails to disclose its calorie count.  Or that it falsely states its calorie count.  Rather, plaintiffs' complaint compares the calorie counts of two different Breyer's brands and concludes that, because the average difference in calories is 14.2% for the various flavors, the statement that Smooth & Dreamy contains one-third fewer calories than regular ice cream is false.

Of course, when I think of regular ice cream, I don't think of Breyer's.  I think of what I eat when I'm not dieting.  It -- like Breyer's -- is also a Unilever brand:  Ben and Jerry's.  When you compare the calorie count of Ben & Jerry's to Breyer's Smooth & Dreamy, the results are really interesting.  For example, one serving (a half cup) of Ben & Jerry's Vanilla ice cream is 230 calories.  According to the complaint, one serving of Smooth & Dreamy Creamy Vanilla is 110 calories.  So Smooth & Dreamy Creamy Vanilla is much more than one-third fewer calories than regular ice cream.  And plaintiffs' complaint is full of hot air.

But plaintiffs claim Unilever has violated the New Jersey Consumer Fraud Act, breached express warranties, and been unjustly enriched.  Accordingly, they plead that they and a putative nationwide class are entitled to the amounts they spent on Smooth and Dreamy, a constructive trust on Unilever's revenues from the sale of Smooth & Dreamy, restitution, disgorgement of profits, injunctive relief, and -- last, but certainly not least -- attorneys' fees and costs.

This lawsuit is a pathetic example of how consumer fraud acts can be abused to hold up companies for tribute, like highwaymen of old.  This is NOT activism to solve a problem.  Anyone who has dieted knows that the first thing you pay attention to when trying to lose weight is the calorie count.  The percentage of reduction from "regular" foods may be interesting, but it doesn't inform you whether you can eat a serving and remain within your daily allotment of calories.  Even if Breyer's statement were false -- WHICH, AS A SIMPLE CALORIE COUNT PROVES, IT IS NOT -- it would not be the cause of any actual harm to consumers.  It is the calorie count that gives consumers the information they need to make dietary decisions.

Let's hope this lawsuit is dismissed on the pleadings, so that Breyer's and Ben & Jerry's can spend their money making delicious new flavors, not defending against frivolous claims.

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Last week District Court Judge Virginia Kendall gave Jim Perdue, the Chairman of Perdue Farms, a nice St. Patrick's Day present:  she dismissed with prejudice a two-year-old putative class action that accused the poultry supplier of a fraud most fowl.  See Nieto v. Perdue Farms Inc., 2010 WL 1031691 (N.D. Ill. Mar. 17, 2010).

Plaintiff, an Illinois resident, had alleged that Perdue, a Maryland corporation, was involved in an offal scheme to defraud consumers.  Because so much of what Perdue sells is packaged chicken breasts, Plaintiff alleged that Perdue had a policy of taking leftover giblets from packaged parts processing and stuffing them into whole chickens, thereby increasing the weight of the chickens by as much as a quarter pound.  Plaintiff alleged that Perdue's failure to disclose that there are extra giblets in whole chickens was a violation of the Illinois Consumer Fraud Act (or, alternatively, Maryland's Consumer Protection Act), as well as unjust enrichment.

Judge Kendall held that she properly had subject matter jurisdiction over the putative class action pursuant to CAFA.  She then analyzed whether plaintiff's complaint met the requirements of Rule 9(b), holding that it did not.  Plaintiff failed to identify who made any misrepresentation and when it was made.  As the court explained:  "Nieto does not allege in what capacity these [Perdue employees] were involved in the alleged fraud, nor does she allege that these people made any misrepresentations-- rather only that they are 'important' to the fraud."  In addition, Plaintiff failed to provide any date for the misrepresentations; rather, she simply alledged that she bought her chicken on October 18, 2008.  And she failed to allege any facts about Perdue's so-called giblet-stuffing policy; rather, she simply pled that she found extra giblets in one chicken.  Accordingly, the court held that she failed to plead her fraud claim with particularity.

The court also dismissed the unjust enrichment claim, noting that in Illinois it is "not a self-sufficient claim, but must rely upon an underlying claim of fraud or breach of fiduciary duty."  The court rejected the notion that a mere product seller is in a fiduciary duty with the purchaser, and it held that plaintiff's failure to meet the "pleading fraud with particularity requirement" required dismissal of the unjust enrichment claim as well.

Having thus cut to the heart of the matter, the court dismissed the case with prejudice, observing that plaintiff had received multiple opportunities to amend her complaint.  Judge Kendall's opinion is a strong reminder that free-range allegations of fraud, without underlying facts, are insufficient to state a claim.

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Continuing with our settlement theme, this post discusses True v. American Honda Motor Co., 2010 WL 707338 (C.D. Cal. Feb. 26, 2010), in which U.S. District Judge Virginia A. Phillip ultimately rejected as unfair a class action settlement that she had preliminarily approved last August.  What changed in 6 months' time?  And can the settlement be salvaged?

Plaintiffs in True had sued Honda under California's Unfair Competition Law, the False Advertising Act, and unjust enrichment, alleging that Honda had falsely advertised the fuel economy of its Honda Civic Hybrid vehicles between 2003 and 2008 and claiming that the class had relied on these misrepresentations in paying a premium price for the vehicles.

It would appear that this is yet another one of those lawsuits that claims that the federal fuel efficiency standards that are required to be posted on new vehicles require certain kinds of driving for hybrid vehicles that some people may not understand actually promotes fuel efficiency, so that when they buy the car and drive it as they would other non-hybrid vehicles, they do not achieve the same fuel efficiency as the advertised performance using the federal standard.

After 11 months of discovery, the parties engaged in mediation and negotiated a nationwide class action settlement that the District Court preliminarily approved.  Notice went out to the class.  Ultimately, there were a number of objectors and a coalition of 25 state Attorneys General that filed oppositions to the initial proposed settlement.  The parties modified the settlement to meet many of the objections, and then moved for final approval by the District Court.

The proposed settlement did not create a settlement fund, but instead created certain categories of relief for class members.  Every class member would receive a DVD that Honda would produce that would demonstrate how to maximize the fuel efficiency of their hybrid vehicles.  Class members also could receive one of two rebates.  Option A gave a $1,000 cash rebate to those who sell their Civic Hybrid and trade it in on an eligible Honda vehicle.  Option B gave a $500 cash rebate to those who kept their Civic Hybrid and bought another eligible Honda vehicle.  In addition, a small subset of class members could receive a $100 cash payment, but only if they complained to their dealer or Honda and the dealer or Honda kept a written record of it. Finally, there was "injunctive" relief requiring Honda to change the advertising phrase "actual mileage may vary" to "actual mileage will vary."

The proposed settlement provided a full release to Honda of all claims relating to the fuel economy of the Civic Hybrid, and it allowed for incentive payments of $10,000 and $12,500 to the named plaintiffs, respectively.  Plaintiffs' counsel sought an award of $2,950,000, which Honda did not oppose.

Judge Phillip held that the class met the numerosity, commonality, and typicality requirements of Rule 23, but it failed the adequacy of representation requirement because the two named plaintiffs were part of the small subset of class members who would receive an actual $100 cash payment.  This presented an inherent conflict with the other class members, the court explained.  The court also held that the predominance and superiority requirements of Rule 23(b)(3) were met.

In assessing the fairness and adequacy of the settlement, the court challenged whether the sub-class of people who received a cash payment was fair at all.  They had no stronger or weaker legal claims than anyone else in the class.  And whether the defendants kept a record of their complaints was not in their control.  The court concluded that "the settlement here draws an arbitrary distinction among class members with identical claims and injuries, and allows some to receive a cash award, and others only a DVD and a limited rebate.  This is patently unfair, and counsels against approval of the proposed settlement."  Id. at *11.

The court also assessed the value of the rebates, noting that this is a coupon settlement that is generally disfavored.  The court analyzed whether the value of the settlement was reasonable in relation to the value of the class claims.

The court determined that the plaintiffs had reasonably strong claims.  It rejected the defendant's preemption defense, discounted the issue of whether California law could apply to a nationwide class, and then proceeded to discuss how strong the California Supreme Court's decision in In re Tobacco II, 46 Cal. 4th 298 (2009) was for the class.  The court did acknowledge, however, that a number of class members had objected to the settlement, indicating that they were pleased with their Honda Civic Hybrids and had achieved the mileage that Honda had advertised.  Id. at *15.  Indeed, the "majority of class members who opted-out . . . cited their satisfaction with the gas mileage they were receiving from their HCHs, or otherwise opposed the merits of the suit."  Id. at *23.

The court rejected the conclusions of plaintiffs' expert, which had assigned monetary values to the rebates and the DVD.

The court also expressed great concern about class counsel's requested fee, noting that a "lodestar amount is particularly inappropriate where, as here, the benefit achieved for the class is small and the lodestar award is large."  Id. at 20.  The court also expressed concern about the procedures used to negotiate the fee:

The size of the fee request also raises concerns in light of the fact that it was negotiated at the same time as the substantive relief to the class.  "Ordinarily, 'a defendant is interested only in disposing of the total claim asserted against it . . . the allocation between the class payment and the attorneys' fees is of little or no interest to the defense.'" . . .

Here, of all of the components of the settlement, the only components with any determinative value are the attorneys' fees and incentive payments.  Under the terms of the settlement, there is no certainty that class members will receive any cash payments or rebates at all, but class counsel will receive a three million dollar payment regardless of whether one or 10,000 class members file valid claims.  Since there is no guarantee that [Honda] will pay any money out of the settlement to either class members or a cy pres beneficiary, to award three million dollars to class counsel who may have achieved no financial recovery for the class would be unconscionable.

Id. at *21 (citations omitted).

As a result of its analysis, the court concluded that the value of the settlement weighed against approval.

The decision in True demonstrates the continuing difficulty of obtaining approval of coupon settlements, even for weak claims that have little, if any, merit.

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