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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Supreme Court Alert

No standing street sign in New York.

** Supreme Court Holds in TCPA Case That a Rule 68 Offer or Relief Does Not Moot Class Claims Under Rule 23 ** . . .                                                                                                               

In the case of Campbell-Ewald Co. v. Gomez (No. 14-857), the Supreme Court issued a writ of certiorari to  the Ninth Circuit to resolve a circuit split on the issue of whether a Rule 68 offer of judgment for complete relief to a putative class representative moots his claim thereby preventing him from serving as a class representative under Rule 23See previous post.  The underlying case concerns unsolicited text messages from an advertising company prohibited by the Telephone Consumer Protection Act (TCPA) 47 U.S.C. § 227.  The defendant company offered Mr. Gomez the statutory TCPA remedy (trebled) and even agreed to a stipulated injunction prohibiting it from further violations the TCPA.   Gomez rejected the offer.  The defendant argued that its offer, which provided complete relief, mooted Gomez’s claim and he therefore did not have Article III standing.  The Supreme Court ruled on January 20, 2016 (in a 6-3 decision) that an unaccepted settlement offer does not moot a plaintiff’s case.  Campbell-Ewald Co. v. Gomez, 577 U. S. ____ (2016).  The conservative-leaning court in recent years has issued rulings that put restrictions on class action lawsuits but did not continue that trend in this case.  Justice Ginsburg delivered the opinion of the Court joined by Justices Kennedy, Breyer, Sotomayor, and Kagan with Justice Thomas concurring.  Chief Justice Roberts filed a dissenting opinion, in which Justices Scalia and Alito joined.  Notably, the ruling is limited in scope, with Justice Ginsburg  pointing out that the Court was not deciding how a case would be resolved if the settlement funds had been deposited into an account payable to the plaintiff and the trial court then entered judgment in that amount.  In reaching its determination that a rejected settlement offer does not moot a complaint, the majority pointed to Rule 68’s sanction – that the offeree must pay the offeror’s costs after the offer was made.  This may turn out to be a silver lining for defendants in certain types of class actions, such as consumer cases, where it is unlikely that the class representative will obtain the full amount of his claim if the case were to proceed to trial.  Costs in class action litigation are no small matter.

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The Injunction Conundrum

** Courts Are Inconsistently Grappling With the Question of Whether a Plaintiff Has Standing for an Injunction Prohibiting Misleading Behavior if They are Aware of the Behavior ** . . .                                                                                                                               

An interesting catch-22 exists with respect to injunctive relief in purported consumer class actions in federal court.  If a plaintiff discovers misleading conduct (for example a mislabeled product), her basis for an injunction would be – relief from the company misleading her again!  But if the plaintiff is aware of the false advertising, is it plausible that she would be misled in future?  To quote the old chestnut – “fool me once, shame on you – fool me twice, shame on me.”  By affirmatively pleading the elements of the misleading conduct, doesn’t a plaintiff inherently disqualify  herself from the standing required to seek an injunction in federal court?  This is the argument that won the day in the recent Yakult case in the Central District of California.  Plaintiff in that case, Nicolas Torrent, sued on the allegation that Yakult’s probiotic beverages that claim to have beneficial cultures which “balance [the] digestive system” are misleading because (according to Plaintiff) there is no credible scientific evidence that the probiotics do what Yakult says they do.  Torrent v Yakult U.S.A. Inc., No 8:15-cv-00124-CJC-JCG (C.D. Cal Jan. 27, 2015) (“By definition, healthy people already have a stable digestive health balance of trillions of intestinal bacteria. Yakult, contrary to what defendant advertises, cannot make a healthy person more healthy in terms of digestive health or otherwise.”)  Plaintiff claimed that Yakult violated California’s Unfair Competition Law (UCL) (Cal. Bus. & Prof. Code § 17200 et seq.) and that he was entitled to restitution and injunctive relief.  Id. at ECF No. 32, Second Amended Compl. ¶¶ 14 – 16.  Curiously, though, by the time of the motion for class certification, Plaintiff dropped his demand for restitution or money damages and only asserted a claim for injunctive relief.  Id. at ECF No. 41, Pl.’s Mot. for Class Cert. ¶ 4.  With only the injunction at issue, the lawsuit became a test case of sorts.  In answering the question, the district court was clear that plaintiff did not have standing as there was “[in]sufficient likelihood that [he] will be wronged in a similar way.”  Id. at ECF No. 52, Order (January 5, 2016) citing Los Angeles v. Lyons, 461 U.S. 95, 111 (1983); O’Shea v. Littleton, 414 U.S. 488, 495-96 (1974) (“Past exposure to illegal conduct does not in itself show a present case or controversy regarding injunctive relief … if unaccompanied by any continuing, present adverse effects.”)  The court noted the split within the Central District of California on the standing issue (see In re ConAgra, 302 F.R.D. 537, 573 – 76 (C.D. Cal. Aug. 1, 2014) (collecting cases)) and acknowledged the counter-argument that to deny injunctive relief would upset the enforcement of the UCL – but ultimately decided that it was not the courts’ place to carve out Article III standing exceptions for consumers.  Order at 6 – 8.  On that basis, Rule 23 class certification was denied.  Highlighting the split on this standing issue, a district court in Illinois just a few days later held the opposite.  Leiner v. Johnson & Johnson Consumer Co., Inc., No. 15-c-5876, (N.D. Ill. Jan. 12, 2016).  In this case. plaintiff claimed that Johnson & Johnson violated the Illinois Consumer Fraud and Deceptive Business Practices Act by labeling and advertising two “Baby Bedtime Bath products” as “clinically proven” to help babies sleep better – when it  allegedly knew the products hadn’t been clinically proven to have that effect. Plaintiff sought to represent a class of Illinois purchasers.  The Illinois court aligned itself with courts that have held that consumers don’t forfeit standing by knowing the basis of their claims observing that, without an exception, consumers could never avail themselves of injunctive relief.

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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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