Class Action Settlements

Frank v. Gaos: Remand, but Little Guidance.Today, the Supreme Court sent Frank v. Gaos back to the Ninth Circuit to address the issue of standing under Spokeo.

Frank involved allegations of privacy violations. Plaintiffs brought class action claims against Google for alleged violations of the Stored Communications Act. The complaints alleged that when an Internet user conducted a Google search and clicked on a hyperlink to open one of the webpages listed on the search results page, Google transmitted information including the terms of the search to the server that hosted the selected webpage.

After three motions to dismiss (none of which disposed of the whole case), the parties negotiated a settlement requiring Google to include certain disclosures on some of its webpages and distribute more than $5 million to cy pres recipients, more than $2 million to class counsel, and no money to absent class members. Objectors appealed the settlement’s approval, arguing that cy pres relief to third-party charities was an improper basis for settlement. (The use of cy pres in this context, which involves remitting class settlement payments to non-parties – often charities – when it is difficult or expensive to make such payments directly to class members, has been the subject of criticism by courts and commentators.)

We were originally watching Frank in the hope that it would give a clear rule on whether and when it is permissible to have cy pres distributions in class-action settlements, but that hope shifted when the Court on its own called for additional briefing on whether the plaintiffs had a concrete injury necessary to confer standing. We then turned our focus to seeing if the Court would provide more guidance on exactly when a mere statutory violation confers standing under Spokeo, a question that has divided lower courts.

Today’s remand provides no real guidance at this point. The Court declined to rule on either the cy pres issue or the standing issue. Despite having raised the standing issue in the first place, the Court punted on its own question, stating that “we are a court of review, not of first view.” Because the Ninth Circuit and District Court had never analyzed the arguments regarding standing under Spokeo, the Court simply called a do-over. It vacated the Ninth Circuit’s judgment in a per curiam opinion and sent the case back to the lower courts for a review of standing. The Court cautioned “[n]othing in our opinion should be interpreted as expressing a view on any particular resolution of the standing question.”

Despite the lack of fireworks and despite the Supreme Court’s caution that we should not read anything in its standing ruling, there is an important takeaway here: the standing question presented was serious enough to require review. If the Court could comfortably say that standing did exist, it presumably would have addressed the cy pres question for which it granted certiorari in the first place. Its decision to vacate the judgment and send the case back to the lower courts signals how serious the standing question is, especially in these kinds of statutory violation cases.

What’s important to the Supreme Court should be important to practitioners. Arguing about standing has its risks (as we have noted), but federal courts are policing standing – especially in the class-action space – more than ever before. Class settlements designed to bring peace and resolve a line of litigation are attractive, but these settlements can be vulnerable to attack by objectors challenging subject matter jurisdiction. That is, after all, what happened in Franks: two objectors challenged a class settlement on jurisdictional grounds and pressed their objections all the way to the Supreme Court.

If we were placing bets, the odds are now against Franks returning to the Supreme Court anytime soon, if ever. But presumably, the Court will look to identify another case raising the cy pres questions that were present in Franks, and we continue to watch for the Court to grant certiorari on the Spokeo questions that ultimately caused Franks to be remanded. So, we wait. Ironically, however, the cases in which the parties resort to cy pres are often those where class members suffered little or no actual harm. So, don’t be surprised if both issues are presented next time the Supreme Court takes on this issue. Let’s hope that when that time comes, the trial court will have already addressed both issues itself.

Practical Effects of the Rule 23 Amendments – Really, Not Very MuchThe December 2018 revisions to Rule 23 are relatively minor, and early cases applying the amended rule confirm that no major changes have occurred. The Southern District of Iowa summed up the theme in Swinton v. SquareTrade, Inc.: The amendments are “mostly form over substance” and “largely [a] codif[ication of] existing case law” that are useful primarily to “focus the Court’s analysis.”

As an initial matter, courts have been applying the new rules even to cases pending when they took effect. The Supreme Court’s order formally amending the rules provides that the rules apply to all actions filed December 1, 2018, and later “and, insofar as just and practicable, all proceedings then pending.” So far, every court to consider the question has applied the amended rule. Again, given the incremental nature of the changes, this result is expected. Absent some prejudice to a party—say, an objector who appeared before the new rules raising the stakes for objections came into effect—parties should expect that the amended rules will apply to their action regardless of the filing date.

The amendments primarily address issues arising in settling class actions, and the available opinions arise in that context. Courts are certainly citing amended Rule 23(e) to evaluate the fairness of settlements, but they are likewise continuing to use pre-amendment standards as well:

  • Hefler v. Wells Fargo & Company, 2018 WL 6619983 (N.D. Cal. Dec. 18, 2018), is one example of the court applying the Rule 23(e) standards and the existing Ninth Circuit rule.
  • Hale v. State Farm Mutual Auto. Ins. Co., 2018 WL 6606079 (S.D. Ill. Dec. 16, 2018) comes from the Seventh Circuit. That case decides that the amended Rule 23(e) “considerations overlap with the factors previously articulated by the Seventh Circuit.”
  • Hays v. Eaton Group Attorneys, LLC, 2019 WL 427331 (M.D. La. Feb. 4, 2019) applies the old Fifth Circuit standard alongside the new Rule 23(e) standard.
  • Becker v. Bank of New York Mellon Trust Co., N.A., 2018 WL 6727820 (E.D. Pa. Dec. 21, 2018) from the Third Circuit notes that the amended Rule 23(e) “factors overlap substantially with the factors identified by the Court of Appeals in Girsh and Prudential.”

In addition to addressing standards for settlement, the amendments impose more explicit standards for objections and place electronic and other alternative means of delivering notice on equal footing with first-class mail in the judicial search for “the best notice practicable” in apprising class members of class certification and settlement. As of yet, no cases have applied these new standards, but we suspect that courts will continue the ever-growing trend of using electronic means to provide class notice.

We will continue to monitor these developments, but—truth be told—we are not holding our breath for any major changes.

The Impact of Disparate State Laws on Class Certification for Settlement Purposes: Ninth Circuit to Review Hyundai and Kia Fuel Economy Decision en BancThe Ninth Circuit has agreed to review a panel decision from the court which rejected a settlement in multidistrict litigation over the fuel efficiency of Hyundai Motor America Inc. and Kia Motors Corp. vehicles. The case and rehearing raise the issue of what weight, if any, is given to disparate state laws when reviewing proposed settlement agreements in a multidistrict case and to what extent courts and class counsel bear the burden of addressing that issue.

The Hyundai and Kia fuel economy litigation was assigned to the U.S. District Court for the Central District of California in 2013. The case involved 12 class actions pending in five federal districts, all involving the marketing, sale and advertising of the mileage estimates for certain Hyundai Motor America  and Kia Motors Corp. vehicles. In all, 56 actions were consolidated into the multidistrict litigation.

An earlier ruling had previously indicated the case was not appropriate for certification because of variances in state laws. Despite this earlier concern, a class was then certified for settlement purposes consisting of current and former owners of specified Hyundai and Kia vehicles registered in the United States. Subsequently, the district court granted final approval of a settlement and dismissed the case.

On appeal, objectors brought five consolidated appeals raising challenges to class certification, approval of the settlement as fair and adequate, and approval of attorneys’ fees as reasonable in proportion to the benefit conferred on the class. A panel of the Ninth Circuit vacated the district court’s order granting class certification in the nationwide class action settlement.

With respect to choice of law issues, the panel held that the district court abused its discretion in concluding that common questions predominated, and in certifying the settlement class under Fed. R. Civ. P. 23(b)(3). The panel noted that Rule 23(b)(3)’s predominance inquiry was far more demanding than Rule 23(a)’s commonality requirement. The panel further noted that where plaintiffs bring a nationwide class action under CAFA and invoke Rule 23(b)(3), a court must consider the impact of potentially varying state laws. Finally, in determining whether predominance was defeated by variations in state law, the panel proceeded through a framework outlined by previous opinions of the Ninth Circuit.

The panel majority quoted from Castano v. Am. Tobacco Co. and stated that, “a court must consider the impact of potentially varying state laws, because ‘[i]n a multi-state class action, variations in state law may swamp any common issues and defeat predominance.’” The panel also relied on Mazza v. Am. Honda Motor Co, under which a judge reviewing a proposed settlement should determine whether predominance is defeated by variations in state law. According to the panel decision, under the predominance inquiry “the class action proponent must establish that the forum state’s substantive law may be constitutionally applied to the claims of a nationwide class.” Once demonstrated, the court applies the forum state’s choice of law rules to determine whether the forum state’s law or the law of multiple states apply to the claims. There is no issue if the result is the application of only one state’s laws to the entire class, but, if class claims require adjudication under the laws of multiple states, then the court must determine whether common questions will predominate over individual issues and whether litigation of a nationwide class may be managed fairly and efficiently.

Applying the predominance inquiry to the case at hand, the panel first determined that California choice of law provisions could permissibly be applied and that this required the district court to apply the California governmental interest test. The court stated that it was undisputed that the district court did not conduct a choice of law analysis, and did not apply California law or the law of any particular state in deciding to certify the class for settlement.  The panel further opined that “factors such as whether the named plaintiffs were in favor of the settlement or whether other class members had an opportunity to opt out are irrelevant to the determination whether a class can be certified.” The court also reasoned that the error in the certification arose because of “the mistaken assumption that the standard for certification was lessened in the settlement context.”

In dissent, Judge Nguyen wrote that, contrary to Ninth Circuit case law and that of other circuits, the majority shifted the burden of proving whether foreign law governed from the foreign law proponent – here, the objectors – to the district court or class counsel, thereby creating a circuit split and violating the doctrine of Erie R.R. v. Tompkins.  Judge Nguyen opined that “[f]ar from imposing geographic limitations, the predominance inquiry under Rule 23(b)(3) simply tests whether questions common to the class are more prevalent or important than individual ones.” She reasoned that the district court permissibly determined that issues regarding fuel economy statements predominated other matters and warranted certification. Judge Nguyen also reasoned it was wrong to require the district court or class counsel to extensively canvass every state’s laws and determine that none other than California’s apply when the issue was not adequately raised by objectors. Judge Nguyen concluded by stating that under the majority’s framework, “no one will recover anything.”

The opinion has already begun to affect other settlements. Given the panel’s admonishments, district court judges have become more cautious in granting approval for settlement agreements, faced with the task of surveying state laws nationwide prior to doing so.  For example, in the U.S. District Court for the Northern District of California, Tesla’s settlement over allegedly faulty Autopilot and safety features is conditioned upon a state law analysis to be completed prior to the court considering final approval (Sheikh et al. v. Tesla Inc.). In another California case, Uber’s settlement concerning “safe ride fees” and employee screening has been paused until the Ninth Circuit’s en banc decision is rendered  (Byron McKnight et al. v. Uber Technologies Inc. et al.). Likewise, a settlement involving ADT security devices has been paused pending the Ninth Circuit’s en banc review (Edenborough v. ADT LLC).

Although certification was still possible if the case were remanded, both plaintiffs and class action defense attorneys filed briefs requesting the full Ninth Circuit to review the ruling arguing that the panel’s January ruling clashed with precedent, would impede nationwide settlements and class action litigation, and would burden trial courts. Others believe that it is impossible for a court to determine the fairness of a settlement without considering potentially meaningful differences in the chances of success of a claim under the laws of one state as opposed to another. Under this view, assessing the fairness of a settlement to all class members in a nationwide class action based on the weaknesses of the claim under the forum state’s law, without considering whether all class members face similar hurdles, would run roughshod over the rights of absent class members. After granting rehearing en banc, the Ninth Circuit has set oral arguments for the week of September 24 in Pasadena, California.