FACTA Cases Continue to Present Ideal Targets for <i>Spokeo</i> Challenges—Eleventh Circuit Defendants Take Particular NoticeWe’ve already written about Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), in which the Supreme Court reaffirmed that all federal plaintiffs, even those alleging a statutory violation, must have suffered a real, concrete injury in order to have Article III standing. As we’ve noted in a past blog post, despite Spokeo’s clear guidance that a mere technical statutory violation, divorced from any concrete harm, is not enough to confer Article III standing, lower courts have divided on how to apply Spokeo to federal statutory class actions. Notwithstanding Spokeo’s inconsistent application in other contexts, many have been willing to use Spokeo as a basis to dismiss claims under the Fair and Accurate Credit Transaction Act or FACTA. One recent example is Kirchein v. Pet Supermarket, Inc.

A quick primer: FACTA prohibits the willful printing of more than the last five digits of a consumer’s credit card number on an electronically generated receipt provided at the point of sale. Even though there is basically no evidence suggesting that consumers’ identities are at any material risk if a FACTA violation occurs, FACTA is a severely punitive statute. Damages for each FACTA violation are between $100 and $1,000, either per customer or per receipt—courts are divided on that question—with no classwide statutory damage cap. The combination of high damages, relative ease of proving violations, and availability of class certification creates strong incentives for plaintiffs to bring FACTA claims as class actions. Plaintiffs asserting FACTA claims usually define the class to exclude consumers who have suffered any actual damages.  Those consumers can recover even more individually under the statute, but proving individual damages often precludes class certification. As a result, FACTA cases commonly feature a large number of unharmed class members.

Enter Spokeo. In that case, the Supreme Court held that Congress cannot declare non-injuries to be injuries for purposes of Article III:

Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right. Article III standing requires a concrete injury even in the context of a statutory violation. For that reason, [the plaintiff] could not, for example, allege a bare procedural violation, divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.

Spokeo’s requirement of harm beyond a mere statutory violation has been very difficult for FACTA plaintiffs to overcome. As Judge Moreno of the Southern District of Florida put it, “the Seventh and Second Circuits, as well as multiple district courts, have held that under Spokeo, a plaintiff who has not suffered any actual harm or material risk of harm lacks standing to sue for violations of the Act” (see Tarr v. Burger King Corp.).  A similar case, Gesten v. Burger King Corp., suffered the same fate at the hands of Judge Scola in the Southern District of Florida.

The latest case to join this line is Kirchein, a FACTA case before Judge Scola that the parties had previously preliminarily settled. The defendant discovered through the course of the settlement process that there were more class members than expected, so it moved to vacate preliminary approval of the settlement. While the court did not directly vacate approval of the settlement, it went much further and dismissed the entire case for lack of subject matter jurisdiction. It noted that, even if it was possible that a FACTA violation could give rise to standing, the injury alleged by the plaintiff did not give rise to standing because the plaintiff did not even allege that his personal information had been involuntarily exposed to anyone.

These cases demonstrate that many garden-variety FACTA complaints are exactly what Spokeo forbids. Federal jurisdiction requires more than a pure procedural issue.

We’ll conclude with four takeaways:

  • First, Spokeo’s injury-in-fact requirement is an issue the defendants should continue to press in every class action seeking only statutory damages, notwithstanding the existence of a few less-than-favorable decisions. The Southern District of Florida’s recent FACTA decisions should give defendants renewed hope in their ability to challenge standing because these cases reflect a growing reversal of a trend of finding standing in similar cases.Many of the early post-Spokeo FACTA cases that found jurisdiction did so by relying on pre-Spokeo cases, particularly Hammer Sam’s East, Inc. While the Eleventh Circuit, in an unpublished opinion about the FDCPA, seemed to give Spokeo a narrow reading in Church v. Accretive Health, Inc., the court later upheld dismissals on Spokeo grounds in other statutory damage cases shortly thereafter (see Meeks v. Ocwen Loan Servicing, LLC,  and Nicklaw v. CitiMortgage, Inc.). Courts with FACTA claims had initially found shelter under Church to keep their cases, but time has proven that shelter far from leak proof. For its part, the Southern District of Florida has now recognized that Spokeo has often dispositive implications for FACTA class actions, and that the pre-Spokeo Hammer case is obsolete.
  • Second, on a related point, defendants may benefit from pressing a Spokeo challenge even if outright dismissal is unlikely. Plaintiffs can be forced into making individualized allegations about how they were personally harmed. Those allegations can then be used as a lever to upend class certification on commonality, typicality, and predominance grounds.
  • Third, while FACTA is particularly egregious in penalizing what looks to be harmless conduct, claims seeking statutory damages under other federal and state statutes are also vulnerable to Spokeo Alleged technical violations of notice provisions under the FDCPA can, in some instances, be pure touch fouls with no harm. Other kinds of data breach claims, such as state-law negligence or privacy claims arising from payment card hacking, are another context in which Spokeo may apply when plaintiffs allege nothing more than an increased risk of identity theft.
  • Fourth, watch out for removal issues. While FACTA raises a federal question and an automatic chance to remove a case, a motion under Spokeo can easily result in a remand. Burger King found this out the hard way: After Judge Scola dismissed the Gesten case, the plaintiff re-filed in state court. Burger King removed, but the district court remanded, noting that Burger King had previously successfully argued that federal jurisdiction does not exist.

Call Me, Maybe? The D.C. Circuit Says Your Smartphone Is Not an AutodialerThe nation breathed a little easier last Friday when the D.C. Circuit ruled that Americans can call or text from their smartphones without violating federal law. That’s because the D.C. Circuit has set aside the Federal Communications Commission’s definition of what constitutes an “autodialer,” a definition that, before last Friday, included the ubiquitous device half of you are using right now to read these words. And since we use these devices to keep in touch, the FCC’s definition – carried to its logical extreme – could have led to liability under the Telephone Consumer Protection Act (TCPA) for almost every unsolicited call or text using a smartphone.  The FCC’s overly expansive definition is no more, however, because the D.C. Circuit ruled in a long-awaited opinion that it was arbitrary and capricious.

The FCC had said that a device with the potential capacity to store and dial telephone numbers using a random number generator was an “automated telephone dialing system” covered by the TCPA. That definition caused the TCPA to “assume an eye-popping sweep,” wrote the D.C. Circuit, since just about every smartphone has the potential (either straight from the factory or when the right app is downloaded) to perform those functions. As a result, “nearly every American is a TCPA-violator-in-waiting, if not a violator-in-fact” because, under the FCC’s “autodialer” definition, “every uninvited communication from a smartphone infringes federal law.” The D.C. Circuit recognized that Congress never intended the TCPA to “constrain [the activities of] hundreds of millions of everyday callers,” so the FCC’s “autodialer” definition could not stand.

The FCC had also said that callers who violated the TCPA by autodialing a reassigned cell-phone number had one chance to learn that they were not actually reaching the person who consented to receiving such calls, whether or not that one call was answered or produced any information as to reassignment. The D.C. Circuit’s opinion also set aside this one-call “safe harbor” as arbitrary and capricious. Although the FCC permissibly interpreted the TCPA’s use of the term “called party” to mean the current subscriber, the court found no justification for why a caller’s “reasonable reliance” on prior consent should “necessarily cease to be reliable” after only one call (or text) regardless of the result of the call. A failure to respond to a text, the D.C. Circuit recognized, or a call that goes to a generic voicemail greeting (e.g., “you have reached XXX-XXX-XXXX, please leave a message”) gives “no indication whatsoever of a possible reassignment.”

The D.C. Circuit’s opinion also upheld the broad parameters permitting a consumer to revoke consent “through any reasonable means that clearly expresses a desire not to receive further messages.” Contracting parties are still free, however, to “agree upon particular revocation procedures.” That provides businesses with a clearer opportunity to achieve compliance with the TCPA revocation requirement than they had before. Without the opportunity to channel revocation contractually into specified methods, tracking revocation can be next to impossible.

The D.C. Circuit’s opinion contains several lessons for current TCPA class defendants and companies wishing to avoid TCPA issues. Among them:

  • If you are defending a case where the autodialer element (TCPA liability requires the use of an “automatic telephone dialing system”) depends on the equipment’s potential capacity, revisit whether the named plaintiff or any class member even suffered a TCPA violation. The FCC’s expansive definition having been set aside, the TCPA’s reference to the “capacity” of equipment arguably should be read to refer to its current capacity only.
  • If the equipment meets the statutory definition of an autodialer, but some of the calls at issue were made without using the autodialer functionality, consider raising a typicality defense. The TCPA prohibits “mak[ing] any call … using any [autodialer],” but class members who received a call because a machine randomly dialed their numbers suffer a different kind of harm than those who received a call because a human being typed their numbers into a device that could have dialed them randomly. Both calls are made using an autodialer – and thus both calls arguably violate the TCPA – but Congress was concerned about preventing only one of them.
  • Any putative (b)(3) class defined to include calls to reassigned numbers should be challenged on commonality and predominance grounds. Since there is no more one-call “safe harbor,” the reasonableness of a caller’s belief that it had consent to contact a particular class member at that number likely must be determined on an individual basis.
  • Contracts with consumers should now include particular revocation procedures; otherwise, the consumer can use “any reasonable means” to revoke consent and tracking revocation becomes a serious problem.

If the FCC again engages in rulemaking regarding the autodialer definition and any “safe harbor” under the TCPA, Chairman Ajit Pai, who as a Commissioner dissented from the 2015 order that was the subject of the D.C. Circuit’s opinion, will preside over the process.

Must the Rule 23 Predominance Requirement Be Satisfied for Purposes of a Class Settlement? The Ninth Circuit Says, “Yes.”In 2015, the Rule 23 Subcommittee to the Advisory Committee on Civil Rules floated the idea of amending Rule 23 to eliminate the predominance requirement for class certification in the settlement context. The suggestions included amendments to that effect within Rule 23(b)(3) itself, or alternatively creating a new Rule 23(b)(4) providing for settlement class certification:

23(B): A class action may be maintained if Rule 23(a) is satisfied and if:

* * * * * *

(4) the parties to a settlement [in an action to be certified under subdivision (b)(3)] request certification and the court finds that the proposed settlement is superior to other available methods for fairly and efficiently adjudicating the controversy, and that it should be approved under Rule 23(e).

The subcommittee explained the thinking behind this idea in draft official commentary to the possible new rule:

Concerns have emerged about whether it might sometimes be too difficult to obtain certification solely for purposes of settlement….Increasing confidence in the ability of courts to evaluate proposed settlements, and the tools available to them for doing so, provide important support for the addition of subdivision(b)(4)…. Subdivision (b)(4) does not require, however, that common questions predominate in the action. To a significant extent, the predominance requirement, like manageability, focuses on difficulties that would hamper the court’s ability to hold a fair trial of the action. But certification under subdivision (b)(4)assumes that there will be no trial. Subdivision (b)(4) is available only in cases that satisfy the common-question requirements of Rule 23(a)(2), which ensure commonality needed for classwide fairness. Since the Supreme Court’s decision in Amchem, the courts have struggled to determine how predominance should be approached as a factor in the settlement context. This amendment recognizes that it does not have a productive role to play and removes it.

The idea was controversial on both sides of the “v.” Many saw it as furthering the perception that class actions were more about making lawyers rich than protecting the interests of class members. Others, such as DRI, feared that it would cause more frivolous class actions to be filed in hopes of luring the defendant into a class settlement:

While it might make cases easier to settle on a class action basis, that is not a valid goal of the rules of procedure where the case is not otherwise deserving of class treatment. There is no good policy reason for a rule providing that claims which are too individualized to be certified as a class for litigation purposes is nevertheless certifiable as a class for settlement purposes….

By definition, what this proposal seeks to do is to enable the classwide settlement of cases in which individualized issues predominate, and foreclose consideration of those overriding individual differences in the settlement certification process. Such a rule, however, would present serious Constitutional concerns given the United States Supreme Court’s past indications that ignoring individual differences has Constitutional implications….If one assumes that the proposed change achieved its stated goal, and that the predominance of individual issues would then no longer be a concern in certifying settlement classes, then the logical result would be that virtually any claim could be pursued on a class basis. While the purports to maintain the “superiority” requirement for settlement classes, the proposed rule fails to articulate what “superiority” would mean once completely divorced from the traditional predominance inquiry. After all, from the narrow perspective of the convenience of the court and abstract efficiency, any class settlement is superior to the prospect of individual litigation by each member of the class. But if that alone is the effective meaning of superiority under this proposal—and it seems it would have to be if the predominance of individual issues is expressly removed from the equation for purposes of settlement—then superiority effectively becomes a rubber stamp for settlement classes. It is indeed difficult to imagine any putative class action that could not be certified for settlement purposes if the predominance of individual issues is truly no longer a concern. Would common law fraud class actions now be certifiable for settlement purposes despite the necessity of proving individual reliance in litigated individual cases? What about nationwide personal injury class actions? Mental anguish claims? How does the proposal guarantee otherwise?… In what sense is a proposed representative adequate and his or her claims typical if each individual’s claim admittedly turns on predominantly individual and not common facts? In what sense is representation for purposes of settlement “adequate” if the representative would not have the power to assert the claims of absent class members in litigation, and the bargaining leverage that comes with the willingness and ability to use that power?

The 23(b)(4) proposal would in fact create unavoidable perverse incentives on the part of counsel for both sides. Plaintiffs’ counsel would now have undeniable incentives, and indeed implicit permission in Rule 23 itself, to file otherwise uncertifiable class action complaints with the intent and purpose of using the cost and risks of defending them to force a class settlement. This problem already exists to a significant extent under the current version of Rule 23, and has been called the “blackmail effect” of class litigation. The 23(b)(4) proposal would make that problem much worse. The federal courts would surely see substantial increases in class action filings, since by definition it would then be entirely permissible to file suit with the aim and purpose of achieving settlement certification even for an otherwise uncertifiable class. These otherwise admittedly illegitimate class actions would then very frequently result in class settlements simply because it would very often be cheaper for defendants to settle these cases than litigate them. Indeed, once these cases are filed, both plaintiff’s counsel and defense counsel would have clear incentives to disregard individualized variations and differences in favor of a deal that, in the absence of Rule 23(b)(4), would surely have been deemed a collusive settlement. After all, Plaintiffs’ counsel in these cases would have little to bargain with in negotiating settlement of these cases, since the defendant would face no real threat of classwide liability in litigation….The abstract efficiency of settling numerous claims at once is simply not a reason in and of itself to certify a class where the underlying issues, claims and damages are predominantly individualized and varying rather than common. In terms of ensuring that the rights of absent class members are fairly represented in proceedings brought by a self-selected class representative, the fees and classwide release that would make such settlement certifications financially attractive to both would-be class counsel and the defendant are hardly a substitute for the identity of interests that the predominance requirement assures.

Ultimately, the 23(b)(4) settlement-without-predominance proposal was left on the cutting room floor, and does not appear in the Rule 23 amendments currently matriculating toward an effective date as early as late 2018. But lower courts are still struggling with the proper role of predominance in the class settlement context, and a recent case from the Ninth Circuit is a good illustration.

In the case of In re Hyundai & Kia Fuel Efficiency Litig., a nationwide class settlement was proposed in a putative class action alleging fuel efficiency misrepresentations by a car manufacturer. Before any settlement had been reached, the trial court had previously indicated that it would deny contested class certification due, among other things, to the fact that state law variations defeated predominance. But then a nationwide class settlement was reached, and for the trial court at least, these concerns disappeared. The trial court approved the nationwide class settlement without analyzing the choice of law issues and resulting state law variations as part of its predominance inquiry, reasoning that the settlement context mooted any such concerns. The Ninth Circuit vacated the class certification and settlement approval.

In doing so, the Ninth Circuit reminded the lower court of the Supreme Court’s admonition that Rule 23 “does not set forth a mere pleading standard.” Comcast Corp. v. Behrand and the Supreme Court’s specific admonitions about the application of Rule 23’s criteria to a class settlement agreed that:

To be sure, when “[c]onfronted with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, for the proposal is that there be no trial.” Amchem [Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997)].  But “other specifications of the Rule—those designed to protect absentees by blocking unwarranted or overbroad class definitions—demand undiluted, even heightened, attention in the settlement context.” Id. “Heightened” attention is necessary in part because a court asked to certify a settlement class “will lack the opportunity, present when a case is litigated, to adjust the class, informed by the proceedings as they unfold.” Id. Indeed, in Amchem itself, the court determined that both factual differences among class members and differences in the state laws applicable to class members’ claims defeated predominance for a single nationwide settlement class. Id. at 624, 117 S.Ct. 2231….

A court may not justify its decision to certify a settlement class on the ground that the proposed settlement is fair to all putative class members. Indeed, federal courts “lack authority to substitute for Rule 23’s certification criteria a standard never adopted—that if a settlement is fair, then certification is proper.” Id. at 622…; see also Ortiz [v. Fibreboard Corp., 527 U.S. 815, 849 (1999)](holding that “a fairness hearing under Rule 23(e) is no substitute for rigorous adherence to those provisions of the Rule designed to protect absentees[.]”) ….

The Ninth Circuit then went on to echo the same concerns DRI had previously voiced about settlement class certification without predominance:

Because the district court made clear that it would be unlikely to certify the same class for litigation purposes, the class representatives were well aware that they would be unlikely to succeed in any efforts to certify a nationwide litigation class. Thus, by “permitting class designation despite the impossibility of litigation, both class counsel and court [were] disarmed.” Id. at 621, 117 S.Ct. 2231. Hyundai and Kia knew that there was little risk that they would face a nationwide litigation class action if they did not reach a settlement agreement. Accordingly, “[c]lass counsel confined to settlement negotiations could not use the threat of litigation to press for a better offer, and the court [faced] a bargain proffered for its approval without benefit of adversarial investigation.”

The majority clearly recognized that when a putative class action that has not been certified is proposed to be certified for settlement purposes, that necessitates two different inquiries: (1) does the proposed class satisfy the requirements for certification of any class under Rule 23(a) and (b), and (2) is the proposed settlement fair, reasonable and adequate under Rule 23(e). Those are two separate inquiries. Both under the plain language of Rule 23 and under binding Supreme Court precedent, they cannot be collapsed into one.

On remand, the district court will have to address predominance once again. It may well be asked to find the predominance requirement satisfied despite the state law variations. The argument would likely be that variation in state law is primarily a manageability problem—one of the considerations that the court normally must examine in assessing predominance and superiority, but one which the Supreme Court said in Amchem is indeed mooted to a large degree in the settlement context. But the trial court will still have to show that despite variations in state law, there remain common issues that are capable of common, classwide answers within the meaning of Wal-Mart Stores, Inc. v. Dukes. And holding courts and parties to that requirement is a good thing. Class certification should not be a judicial goal unto itself. Class actions are and should be a limited exception to the general rule that each individual litigant should have to prove his or her own claim on an individual day in court. And Rule 23(b)(3) class actions, the most “adventuresome” exception of them all, should be available only when proof of liability for one truly would be proof for all. The desire of a court to encourage settlement does not justify ignoring this fundamental due process limitation on the class action device.

This case illustrates another practice pointer as well. As a defendant, if you think you might be interested in settling a class action, you would be well-advised to explore that before filing a motion to strike class allegations or an opposition to class certification. Otherwise, as happened here, your arguments against class certification may be quoted back at you by objectors to your later-proposed settlement.