Say What? Ninth Circuit Says Affirmative Defenses Can’t Stop Class Certification Unless Defendant Proves the Merits of the Defense as to Every Single Class MemberJust when you thought litigating Telephone Consumer Protection Act (TCPA) class actions was as unsafe as it could get for defendants, the Ninth Circuit said, “Not so fast.”

In McKesson v. True Health, two chiropractic practices sought to represent a class of plaintiffs who allegedly received unsolicited faxes containing advertisements in violation of the TCPA. The district court denied class certification under Fed. R. Civ. P. 23(b)(3) on the grounds that consent was the primary issue to be adjudicated under the TCPA and the defendant offered a substantial showing that whether class members had provided consent could only be determined individually. The Ninth Circuit reversed and, in the process, managed to run a wrecking ball through what many thought was well-settled law on the burden of proof at the class certification stage.

From Affirmative Defense to Burden of Proof

First, the Ninth Circuit detoured into a finding that consent is an affirmative defense in a TCPA case, a proposition that itself is not free from debate. The court then leaped from that conclusion to one even more radical: that because the defendant would bear the burden of proof on the merits of the consent defense at trial, the defendant also bore the burden of proving that consent was an individualized issue and that it predominated over common issues for class certification purposes. No other circuit has ever held that a defendant bears the burden of proof on any issue relating to class certification.

That’s enough bull in the class action china shop for one day, right? Wrong. The defendant’s showing that consent was an individualized issue consisted of proof of consent by various class members through various means. However, the defendant had not attempted to prove the presence or absence of consent as to each and every class member.

The Ninth Circuit concluded that McKesson had, therefore, only carried its burden of proving that consent was an individualized impediment to certification for some but not all class members. The Ninth Circuit also concluded that class members as to whom proof had been offered would be excluded from the class and the rest of the class could be certified. McKesson petitioned the Supreme Court for a writ of certiorari.

Amicus Brief Submitted to Supreme Court

On behalf of DRI, the Voice of the Defense BarTM, your friends and humble narrators here submitted an amicus brief urging the Supreme Court to review the case. DRI argued that the Ninth Circuit’s ruling effectively creates a presumption in favor of class certification in cases involving individualized affirmative defenses and impermissibly shifted the burden of proof on class certification. This, DRI argued, contravenes both Supreme Court precedent and the approach of every other circuit to address the issue.

Who bears the burden of proof on the merits of an issue at trial has nothing to do with whether the controversy as a whole is appropriate for class adjudication or the procedural requirements the reviewing court must follow in evaluating predominance under Rule 23. The case law until now has been uniform: The plaintiff bears the burden of proof on all issues pertaining to class certification. This case offers no sound reason in policy or in the text of Rule 23 to deviate from that long-settled approach.

DRI’s amicus brief further points out that to defeat class certification under the Ninth Circuit’s framework, the defendant is effectively forced to marshal the exact kind of individualized proof that class certification seeks to avoid. This, too, is a practical impossibility, such that the ruling effectively alters substantive law by gutting the defendant’s ability to rely on affirmative defenses when a claim is brought on a class basis. The Rules Enabling Act makes clear that a mere rule of civil procedure is not supposed to have such an effect.

The insupportable consequences of such a drastic change in settled class action law are particularly acute in the context of TCPA class actions since the TCPA provides for potentially ruinous uncapped statutory damages for even the most minor and most technical violations, whether or not they produce any real injury.

We are hopeful that the Supreme Court will grant review in this important case, as it has profound implications for class action practice.

Be careful before you forward that email. That’s the lesson from the recent Supreme Court decision in Lorenzo v. Securities and Exchange Commission, in which the court held that that Think before Hitting “Send”: Supreme Court Upholds Liability under Securities Laws for Forwarding Someone Else’s False Statementthe director of investment banking for a broker-dealer was liable for participating in a scheme to defraud investors when he forwarded two emails prepared by his boss.  The contents of the emails reported that the investment target had “confirmed assets” of $10 million, a statement Mr. Lorenzo knew to be false. The emails did not reveal the fact that the company had publicly stated that its assets were worth less than $400,000.

The Securities and Exchange Commission found Mr. Lorenzo liable for sending statements to investors that were false and misleading with the intent to defraud, thus violating Rule 10b-5, § 10(b) of the Exchange Act and § 17(a)(1) of the Securities Act. The SEC barred Mr. Lorenzo from working in the securities industry for life and fined him $15,000. On appeal from the D.C. Circuit, the Supreme Court held that dissemination of false or misleading statements with intent to defraud can fall within Rules 10b-5(a) and (c) even if the disseminator did not “make” the statements himself. “By sending emails he understood to contain material untruths, Lorenzo ‘employ[ed]’ a ‘device,’ ‘scheme,’ and ‘artifice to defraud’ within the meaning of subsection (a) of the Rule…. By the same conduct, he ‘engage[d] in a[n] act, practice, or course of business’ that ‘operate[d] … as a fraud or deceit’ under subsection (c) of the Rule,” the Supreme Court said. In so holding, the court noted Rule 10b’s expansive language and reasoned that to absolve Mr. Lorenzo from liability on the basis that he was not the “maker” of the statements would be to allow plainly fraudulent behavior to fall outside the scope of the rule.

Writing for a 6-2 majority (Justice Kavanaugh took no part in the case), Justice Breyer’s opinion bolsters the authority of the SEC in enforcement actions, particularly in affirming Mr. Lorenzo’s primary liability for his conduct (as opposed to secondary liability, e.g., aiding and abetting the maker’s fraudulent statement). Justice Thomas’ dissent argued that Mr. Lorenzo’s “essentially administrative” conduct was more appropriately addressed by secondary liability and that other acts beyond forwarding someone else’s false statement would be required to find primary liability under subsections (a) and (c). Under the majority’s rationale, might primary liability attach, Justice Thomas wondered, to a secretary in the same situation as Mr. Lorenzo? For the majority, the fact that the emails were sent with intent to defraud – significantly, Mr. Lorenzo did not challenge the D.C. Circuit’s finding that he acted with the necessary scienter – seemed to carry the day. As Justice Breyer concluded, “Congress intended to root out all manner of fraud in the securities industry. And it gave the Commission the tools to accomplish that job.” Lorenzo thus reinforces the SEC’s broad powers and may well lead to even more robust enforcement actions.

Another Punt: The Supreme Court Denies Certiorari in the <i>Zappos</i> CaseWe wrote recently about how the certiorari petition in, Inc. v. Stevens was a possible vehicle to put the question of standing in data breach cases back before the Supreme Court. Alas, the Court denied the certiorari petition on March 25.

Combined with the Supreme Court’s remand in Frank v. Gaos, those wishing for a landmark standing decision must wait a little longer.

Given the small number of certiorari petitions granted, the odds are always against a particular petition producing a merits decision. That said, this issue will likely demand resolution at some point – denying a petition does not resolve the underlying split between the various Circuit Courts of Appeal.

As matters now stand, the 3rd, 6th, 7th, 9th and D.C. Circuits have all decided cases in a manner that suggests that a plaintiff suffers an injury-in-fact if the plaintiff’s information is contained in a database that is breached. The 1st, 2nd, 4th and 8th Circuits all require an injury beyond a mere breach. As this split becomes more entrenched (and presumably expands into the 10th and 11th Circuits), expect the issue to return to the Supreme Court’s docket.