Rule 23

No New Year Cheer For “Meaningless” Class Settlements

** Second Circuit Affirms Denial of Class Certification in Low Ball Settlement of New York Fair Debt Collection Suit **                                                                                                                                                                                                                                                                                                                                                                                                                          

A recent Second Circuit decision highlights the thorny issues involved in a “low dollar” class settlement.  In Gallego v. Northland Group Inc. No. 15-1666-CV (2d Cir. Feb. 22, 2016), Gallego, along with about 100,000 New York residents, received a rather perky dunning letter from defendant collection agency Northland in January 2014 declaring, “IT’S A NEW YEAR WITH NEW OPPORTUNITIES!” and inviting Gallego to settle his debt with a department store credit card company.  Rather than heralding the new year by settling the claim, Gallego rang it in by bringing a putative class action lawsuit against Northland under the Fair Debt Collection Practices Act (“FDCPA”).  The substance of the claim was dubious – attempting to bootstrap a technical violation of the New York City Administrative Code (not providing the name of an individual to contact) into a false representation or unfair or unconscionable means under the FDCPA.

Northland, apparently calculating that it was cheaper to settle than fight, entered into a proposed settlement with Gallego.  In addition to an attorneys’ fee cap of $35,000, Northland agreed to establish a settlement fund of $17,500 – approximately 1% of the net worth liability limit under the FDCPA.  Gallego would receive a $1,000 incentive fee and the remaining $16,500 would be distributed pro rata to class members who made a claim.  The proposed settlement dissolved if there were 50 opt outs – who could then bring individual actions under the FDCPA with statutory damages of $1,000 each plus attorney fees.

The district court denied class certification under Rule 23(b)(3) superiority observing that class members would receive 16.5 cents each while, if they brought individual actions, they might each recover $1,000 statutory damages and attorney fees. Gallego v. Northland Group Inc. 102 F.Supp.3d 506 (S.D.N.Y 2015).  The court opined that the prospects of a recovery measured in pennies would likely result in “mass indifference” among most class members who would be deterred from filing individual lawsuits or joining the class.  This could result in a few class members reaping a windfall from the settlement.  “The prospects of mass indifference, a few profiteers, and a quick fee to clever lawyers is hardly the intended outcome for Rule 23 class actions.”

On appeal, the Second Circuit agreed that the district court did not abuse its discretion by denying certification.  Gallego argued that it was unlikely that all 100,000 class members would make claims so the individual class member recovery would be higher (a particularly noteworthy admission given that because Northland sent the offending letters in the first place – individual notice was practical and would likely be effective in this case) – basically agreeing with the district court that there would be “mass indifference” to the settlement.  The Court of Appeals retorted, “An expected low participation rate is hardly a selling point for a proposed classwide settlement.”  The Second Circuit went even further, determining that the district court would have been right in doubting that Gallego would “fairly and adequately protect the interests of the class,” as required by Rule 23(a)(4) pointing out that the proposed settlement included a release – not only of class members’ FDCPA claims – but all “claims arising out of any of the facts, events, occurrences, acts or omissions complained of in the Lawsuit, or other related matters . . . relating to letters sent to them that are substantially similar to the letter” received by Gallego.

It is important to reiterate that the FDCPA provides for an individual right of action with statutory damages as well as attorney fees, which are often absent from general consumer protection statutes.  This made it easy for the district court to find that the class action lawsuit was not a superior method for resolving the dispute given the proposed settlement value.  Nevertheless, the district court’s “a plague on both your houses” conclusion on class certification serves up a cautionary note:  “Because I find that certifying a class would do little more than turn [Nortland’s] settlement with Mr. Gallego into a general release of liability from all similarly situated plaintiffs at minimal extra cost while furthering a cottage industry among enterprising lawyers, class certification is denied.”

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All Eyes on the Supreme Court for Consumer Class Action Lawyers

supreme-court

**The Supreme Court’s 2015 Term Opens With a Series of Cases Important for Consumer Class Action Defendants: Campbell-Ewald v Gomez, Spokeo v Robins and Tyson Foods v Bouaphakeo** . . .                                                                                                                                                                                                                                                          

In recent years, the Supreme Court has handed down victories to the class action defense bar.  In Wal-Mart v. Dukes, 564 U.S. ___ (2011), the Court reversed a California district court certification of a gender discrimination class – raising the bar on commonality questions for plaintiffs.  In Comcast v. Behrend, 569 U.S. __ (2013), the Court again reversed a district court certification – heightening scrutiny on plaintiffs’ methods for alleging class wide damages.  As the 2015 term opens this week, defense counsel around the country eye further potential victories in three key cases.

The first case up is Campbell-Ewald Co. v. Gomez (No. 14-857) on appeal from the Ninth Circuit where the Court will deal with two frequently litigated questions as yet unresolved by the circuits.  Namely, does a Rule 68 offer of complete relief to a plaintiff moot his or her claim and, if so, does it also moot the resulting class claim under Rule 23?  The underlying case concerns unsolicited text messages prohibited by the Telephone Consumer Protection Act (TCPA) 47 U.S.C. § 227.  The TCPA contains a statutory remedy and defendants argued that, to the extent they had offered Plaintiff  the full amount of the statutory remedy (per Rule 68) as relief,  the plaintiff suffered no cognizable Article III damages.  Thus, defendants argue that because the plaintiff suffered no injury,  he has no right to represent a class of people who may have been damaged.  From a practical perspective, the case addresses the question:  Can a defendant “pick off” would be class representatives through Rule 68 offers of judgment thereby destroying the foundation of the class action claim?  As anyone who has defended corporations receiving required pre-litigation notices under consumer protection statutes has observed, plaintiff law firms have become increasingly reticent to disclose the identity of their clients at the notice stage in order to forestall Rule 68 offers of judgment until the putative class action lawsuit has been filed.

The second case is Spokeo Inc. v. Robins, (No. 13-1339) also on appeal from the Ninth Circuit.  This case involves a related question of Article III standing for class representatives.  Spokeo concerns the  Fair Credit Reporting Act, 15 U.S.C. § 1681 (FCRA), which requires consumer credit agencies to take reasonable steps to ensure the accuracy of their published reports.  Plaintiff in a putative class action argued in the Central District of California that results for his name on the Spokeo website contained inaccurate information about plaintiff’s education and professional experience – and that this inaccuracy harmed his employment prospects.   The District Court dismissed, finding that the alleged damages – based on hypothetical impact on his employment – were too speculative to satisfy Article III standing.  The Ninth Circuit reversed, holding that the statutory violation implicitly creates a private cause of action to enforce and that this violation of a statutory right was an “injury” sufficient to confer standing.  The Ninth Circuit Spokeo decision was the latest in a circuit split – on one side the Second and Fourth circuits, which have rejected standing arguments from plaintiffs who alleged bare statutory violations that did not result in any actual harm (Kendall v. Emps. Ret. Plan of Avon Prods., 561 F.3d 112 (2d Cir. 2009); David v. Alphin, 704 F.3d 327 (4th Cir. 2013)); and the Ninth Circuit joining the Sixth and Seventh Circuits, which have come out on the side of recognizing “damages” for private plaintiffs with respect to minor statutory violations.  Beaudry v. TeleCheck Servs, 579 F.3d 702 (6th Cir. 2009); Murray v. GMAC Mortg. Corp., 434 F.3d 948 (7th Cir, 2006).  If the Supreme Court recognizes damages irrespective of actual harm, the impact could be felt more broadly than FCRA – there are numerous similar statutory schemes, including truth-in-lending legislation (15 U.S.C. § 1640(a)); debt collection statutes, (15 U.S.C. § 1692k(a)); as well as various privacy laws (18 U.S.C. § 2710(c)(1); 47 U.S.C. § 551(f)(1)-(2)).

The third case is Tyson Foods v. Bouaphakeo (No. 14-1146) – a challenge to a $5.8 million wage-and-hour judgment in favor of a class of employees at Tyson’s meat packing plant in Iowa.  Tyson’s petition seeks a reversal of the district court and Eight Circuit’s decision to permit liability and damages verdicts to be based – not on an individual analysis of each purported class member – but by extrapolating a statistical average across the board based on the discrepancies observed in a sample class of workers’ hours and pay.  Tyson further appeals on the lack of ascertainability of the class itself – that is, that the certified group (even according to the Plaintiffs’ own expert) included a significant number of people who weren’t underpaid at all.  If successful, the Tyson case will build upon the Court’s disapproval in Wal-Mart of “trial by formula” and provide a significant bulwark against plaintiffs in putative class actions glossing over differences amongst their claimed class in order to achieve certification.

Not surprisingly, this trifecta of cases has generated a significant amount of interest, amicus briefing, and optimistic thinking from the defense bar that momentum is on its side.  The implications are not insubstantial if defendants prevail:  the type of de facto strict liability for statutory compliance created by such class actions will diminish, there will be new avenues to derail cases pre-certification, and the barrier of ascertainable and reliable class wide damages that plaintiff s must hurdle will be reinforced.

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Google Reversed on Rule 23

**Ninth Circuit Chips Away at Individualized Damage Preclusion under Rule 23 Predominance – reversing Google’s District Court Win on Certification ** . . .                                                                                                                                                                                                        

The Ninth Circuit has held in Pulaski & Middleman, LLC v. Google, Inc., No. 12-16752, 2015 WL 5515617 (9th Cir. Sept. 21, 2015) that under California’s Unfair Competition Law (UCL) (Cal. Bus. & Prof. Code § 17200 et seq.) and Fair Advertising Laws (FAL) (Cal. Bus. & Prof. Code § 17500 et seq there is no need for a court to make individual determinations regarding entitlement to restitution.  In this case, Google was sued in the Northern District of California in relation to its ubiquitous AdWords advertising.  Plaintiff alleged that it was unfair and misleading for Google to charge AdWords users for ads that were served up on error pages and parked domains (i.e. on pages with no real content).  The district court denied certification holding that it could not simply assume that every AdWords member who had ads placed on error or parked pages derived no economic benefit from the ads.  Rather, an individualized analysis was required that precluded class treatment.  The Ninth Circuit panel disagreed.  It held that under California’s UCL and FAL, the test is whether members of the public were “likely to be deceived” – thus an individualized inquiry is not required to achieve certification.  In other words, the Ninth Circuit parsed between an entitlement to restitution (a common question) and what the restitution actually is (an individual question) and held that only the former was required at the certification stage.  As such, the circuit panel held it was legal error for the district court to focus on individualized restitution.  The court held that its ruling in Yokoyama v. Midland Nat. Life Ins. Co., 594 F.3d 1087 (9th Cir. 2010) that damage calculations alone cannot defeat certification governed.   The Ninth Circuit’s laser focus on “liability” and its warning to district courts not to  conflate restitution calculations with liability inquiries (which can be traced back to the California Supreme Court In re Tobacco II Cases, 46 Cal.4th 298 (2009)) sets a difficult course for UCL and FAL defendants to navigate.

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