Financial Services Class Actions

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.

A Look Back at Significant Developments in Class Action Law in 2017From the standpoint of class action practice, 2017 was as important for what did not happen as for what did.  Here are some of the highlights and lowlights of the 2017 class action scorecard, with a look forward to how the impact of some of those developments may be felt in 2018.

A brave new world for personal jurisdiction

If you got out of law school more than a decade or so ago, most of what you learned about personal jurisdiction is now obsolete.  The once determinative “minimum contacts” analysis has now all but gone the way of the human tail. Whatever remains of it is fairly insignificant at this point.  What matters now is the “general” versus “specific” jurisdiction dichotomy. In simplified terms, to the extent the defendant is being sued specifically for sales or other conduct in the forum state, specific jurisdiction perhaps attaches. Otherwise, the defendant is likely subject to suit only where it is incorporated or has its principal place of business.  This lesson was driven home in Bristol-Myers Squibb v. Superior Court of California, San Francisco County, 582 U.S. ___ (2017), where a large number of nonresident plaintiffs joined a large number of resident plaintiffs in a mass action alleging tort claims associated with the drug Plavix.  In an 8-1 decision, the Supreme Court ruled as a matter of substantive due process that there was personal jurisdiction over BSM only as to the claims of the resident plaintiffs.  The prevailing wisdom, and the view of a majority of courts to address the issue since this decision came down, is that the same analysis applies to class actions (e.g., LDGP, LLC v. Cynosure, Inc., Case No. 15 C 50148 (N.D. Ill. Jan. 16, 2018); McDonnell v. Nature’s Way Prods., LLC, No. 16-cv-5011 (N.D. Ill. Oct. 26, 2017); Spratley v. FCA US LLC, No. 3:17-cv-62 (N.D.N.Y. Sept. 12, 2017); In re Dental Supplies Antitrust Litig., No. 16-cv-696 (E.D.N.Y. Sept. 20, 2017); Plumbers’ Local Union No. 690 Health Plan v. Apotex Corp., No. 16-cv-665 (E.D. Pa. July 24, 2017); Jordan v. Bayer Corp., No. 4:17-cv-865 (E.D. Mo. July 14, 2017)).  The effective result would seem to be that a corporation can now be subjected to nationwide class certification only in its home states.  Smart corporations now domiciled in class-friendly jurisdictions will now therefore evaluate whether there is reason to relocate their domicile and principal place of business to more defendant-friendly jurisdictions.

Spokeo produces mixed results for subject matter jurisdiction in statutory damages class actions

It has been more than a year and a half since the Supreme Court handed down its landmark Spokeo, Inc. v. Robins, 578 U.S. ___ (2016) decision, which made clear that Article III requires all plaintiffs to have suffered a “concrete” injury to bring suit in federal court.  Unfortunately, in that time, Spokeo has not become the statutory class action panacea that the defense bar hoped for—and, as we documented in a previous blog post, lower courts attempting to apply Spokeo have done so in often confusing and inconsistent ways.  Spokeo’s application to claims brought under some of the most frequently sued-under federal consumer protection statutes provide a good illustration of this.  For example, courts have reached mixed results when it comes to applying Spokeo to alleged FDCPA violations.  Mere technical timing FDCPA violations, such as a slight delay in sending a required notice that does not result in any prejudice, are almost certainly insufficient to confer Article III standing.  But the outright denial of information may be sufficient, even where there are no allegations that the denial caused any real harm.  Or maybe not.

Alleged FACTA violations have also generated mixed results, including divergent views on whether printing a credit card expiration date is alone sufficient to confer Article III standing (compare Meyers v. Nicolet Rest. Of De Pere, LLC, 843 F.3d 724 (7th Cir. 2016) with Deschaaf v. Am. Valet & Limousine Inc., 234 F. Supp. 3d 964 (D. Ariz. 2017)).  And perhaps most confused is how courts have applied Spokeo to FCRA claims.  For example, in Dreher v. Experian Information Solutions, Inc., the Fourth Circuit held that the failure to provide the sources of credit information on the plaintiff’s credit report was not, by itself, a sufficiently concrete harm to confer Article III standing; a plaintiff must show that the denial of information has caused him “‘real’ harm with an adverse effect.”  In sharp contrast, in In re Horizon Healthcare Services Inc. Data Breach Litigation, the Third Circuit refused to require any showing of harm or a material risk of harm from an alleged FCRA violation, holding instead that in creating a private right of action to enforce the FCRA, Congress demonstrated its judgment that any “violation of FCRA causes a concrete harm to consumers.”  The only relative consistency:  TCPA violations—which generally result in the plaintiff’s phone line being tied up and ink and paper being used—are almost always sufficient to confer Article III standing.

Unfortunately, it doesn’t look like the Supreme Court will provide additional guidance any time soon about how to determine whether an alleged statutory violation has resulted in a sufficiently “concrete” injury for Article III standing purposes.  Earlier this week, the Court denied the Spokeo defendants’ cert petition, which had sought review of the Ninth Circuit’s decision on remand that the plaintiff’s alleged injury in that case—dissemination of false credit information that may have actually improved the plaintiff’s credit score—was sufficient to confer standing under Article III.

The Circuit split over ascertainability gets even deeper

2017 saw the Ninth Circuit join the Sixth, Seventh, and Eighth Circuits in rejecting the (until recently) long-settled notion that Rule 23’s “numerosity” requirement implicitly contains a requirement that the class be ascertainable in an administratively feasible way before a class can be certified.  To varying degrees, these courts endorse concepts like “fluid recovery” and self-identification through affidavits in addition to finding that Rule 23 does not require that the actual class member be known before proceeding past certification to the merits.  This of course presents all sorts of due process concerns for class defendants, who protest the unfair settlement pressure, one-way res judicata effect, and due process problems associated with kicking the class member identification problem to the very end of the class litigation timeline.  The Second, Third, and Eleventh Circuits all still require some meaningful degree of ascertainability.  This is an issue class defendants will want to be sure to preserve if they find themselves in a jurisdiction hostile to the ascertainability requirement.  Class defendants in jurisdictions hostile to an ascertainability requirement will also want to recast any ascertainability problem as one of commonality, predominance, and/or superiority.

American Pipe re-fitting

In a pair of cases, the Supreme Court used 2017 to answer some long unsettled questions relating to class action tolling under American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983).  The American Pipe rule generally holds that the statute of limitations is tolled for the claims of class members during the pendency of a class action until certification is denied or abandoned.  In California Public Employees’ Retirement System v. ANZ Securities, Inc., et al., 137 S. Ct. 2042 (2017), the Supreme Court held that there is no such tolling with regard to rules of repose, and in China Agritech, Inc. v. Resh, Dkt. No. 17-432, it granted cert to resolve a circuit split over whether such tolling applies only to subsequent individual claims by class members or also to successive class actions by class members.

The Congressional Review Act trumps the CFPB’s effort to prevent financial institutions from utilizing class waivers

In 2017, the CFPB finally made good on its threat to ban financial entities from utilizing arbitration clauses with class waivers to avoid or limit class actions. A few weeks later, both houses of Congress invoked the Congressional Review Act to nullify this CFPB rule.  President Trump then signed the nullification resolution, which under the CRA has the effect of prohibiting the CFPB from attempting any similar rule again.  Bradley’s Class Action team chair Mike Pennington was a principal author of DRI’s written comments opposing the CFPB rule.

New amendments to Rule 23 proposed to become effective in December 2018

In 2017, a set of settlement-related amendments to Rule 23 were formally set in motion, on a track likely to make them effective this December. The amendments front-load the evidentiary proof and modernize the notice and objection procedures necessary to achieve so-called “preliminary approval” and “final approval” of a class settlement. On behalf of DRI, Bradley’s Class Action team members Mike Pennington (whose hearing transcript is available here), Scott Smith, and John Parker Sweeney all submitted written comments and testified in public hearings before the Advisory Committee on Civil Rules and its Rule 23 Subcommittee regarding these and other proposed amendments to Rule 23.

SCOTUS holds that voluntary dismissal cannot be used as a tool to seek mandatory appellate review of class certification denials

In Microsoft v. Baker, a unanimous Supreme Court closed a loophole recognized in some circuits that permitted class action plaintiffs to seek immediate appellate review of an adverse class certification decision by voluntarily dismissing their claims with prejudice.  The practical effect of the Court’s ruling is that class action plaintiffs no longer have a mechanism for seeking immediate mandatory appellate review of class certification denials.  Instead, to obtain interlocutory review, plaintiffs must rely on either Rule 23(f), 28 U.S.C. § 1292(b), or a writ of mandamus, all of which give circuit courts discretion on whether to hear an appeal.

Judge Posner retires after nearly 40 influential years on the bench

Arguably the country’s most influential non-Supreme Court jurist ever, Judge Richard Posner retired abruptly from the Seventh Circuit in September 2017.  During his nearly 40 years on the bench, he had tremendous impact in shaping legal views and discourse on a host of issues.  Rule 23 was no exception, as Judge Posner’s views on the appropriateness of class certification have become deeply ingrained in the collective legal consciousness.  For example, relatively early in his career as a jurist, Judge Posner authored several opinions that reigned in class certification excesses, recognizing that plaintiffs often use class certification of dubious claims as a tool to extract “blackmail settlements.”  Notably, in In re Rhone-Poulenc Rorer Inc., 51 F.3d 1293 (7th Cir. 1995), Posner is credited with sounding the death knell for the class treatment of personal injury class actions.

More recently, Judge Posner authored opinions permitting class certification where the class action device was seen by him as the most efficient (and, as a practical matter, only) tool for resolving the class members’ disputes.  As Posner stated in Carnegie v. Household International, Inc., 376 F.3d 656 (7th Cir. 2004), which affirmed certification of a settlement-turned-litigation class, if the individual claims in a putative class are of sufficiently low value, then the “realistic alternative to a class action” may not be “17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”  Most recently, Judge Posner overturned a series of class action settlements that offered little benefit to the class but huge fees to class counsel (see, e.g., In re Walgreen Co. Stockholder Litig., 832 F.3d 718 (7th Cir. 2016); Redman v. Radioshack Corp., 768 F.3d 622 (7th Cir. 2014); Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014)).  Judge Posner’s immense impact on class action litigation will not be soon forgotten.

SCOTUS to clarify SLUSA’s application to class claims brought under the Securities Act of 1933

Currently pending before the Supreme Court is Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439 (filed May 24, 2016), which concerns the preemptive scope of the Securities Litigation Uniform Standards Act of 1998 (SLUSA).  By way of refresher, SLUSA preempts all state law causes of action for fraud in connection with the purchase or sale of securities—any such fraud claim must be based on federal law, i.e., the Securities Act of 1933 or the Securities Exchange Act of 1934.  At issue in Cyan is whether SLUSA also divests state courts of jurisdiction to hear class action claims brought under the Securities Act of 1933 (e.g., claims based on fraudulent misrepresentations or omissions in a registration statement).  Federal courts already have exclusive jurisdiction over claims brought under the Securities Exchange Act of 1934 (e.g., 10b-5 securities fraud claims).

Oral argument in Cyan occurred on November 28, 2017, although it only revealed the Court’s complete confusion about how to interpret SLUSA, which was (aptly) described as “obtuse,” “odd,” and, by Justice Alito, “gibberish.”  The Justices’ confusion has been mirrored in the state and lower federal courts, which have reached wildly inconsistent and chaotic results on the issue.  If the Court rules in Cyan’s favor, then all class claims under the Securities Act will have to be brought in federal court, subject to the procedural strictures of the PSLRA.  But if the Court rules in the plaintiffs’ favor, then investors will be able to avoid the PSLRA by filing their Securities Act claims in more favorable state court jurisdictions.  The Solicitor General has also entered the fray, advocating for a hybrid position: that SLUSA permits plaintiffs to bring Securities Act claims in state court, but also permits defendants to then remove those claims to federal court, should they so choose.  We anticipate a decision in the first half of 2018.

A welcome narrowing of the scope of the TCPA

As everyone reading this blog well knows, the TCPA has become a boon for the consumer protection plaintiffs’ bar.  This shouldn’t be surprising, given the TCPA’s (mostly) strict liability, statutory damages of at least $500 per violation (and up to $1500 for “willful” violations), and no damages cap.  Fortunately, however, a pair of D.C. Circuit cases may be beginning to reverse the tide.  First, was the D.C. Circuit’s decision in Bais Yaakov of Spring Valley v. FCC, 852 F.3d 1078 (D.C. Cir. 2017), which struck down an FCC rule that had required senders of faxes to include opt-out notices on all messages, even though the statute itself only required such notices on non-solicited messages.  Now, pending before the D.C. Circuit is ACA International v. FCC, Case No. 15-1211 (D.C. Cir., filed Nov. 25, 2015), which challenges the validity of the FCC’s broad and oft-criticized interpretation of what constitutes an Automatic Telephone Dialing System, as well as FCC rules concerning the identity of the “called party” in the reassigned number context and the means by which a called party may revoke consent.  How the D.C. Circuit resolves ACA International could potentially have a huge impact on stemming the tide of rampant TCPA class actions.

The Fairness in Class Action Litigation Act stalls in the Senate

Finally, the House passed H.R. 985, also known as the “Fairness in Class Action Litigation” Act, in March 2017 by a largely party-line vote.  We have already discussed in detail how the current version of the bill could potentially change class action litigation—and made proposals to improve the bill.  Thus far, the Senate has taken no action on the bill, just as the Senate took no action on an earlier and more modest version of the Fairness in Class Action Act previously passed by the House.  It remains to be seen whether the bill will be revisited this year, although currently there does not appear to be any political momentum to do so.  If the bill does not become law by the end of 2018, then the legislative process will go back to square one.

Growing Consensus in the Courts of Appeals against Alternative-Citizenship Theory of Diversity under CAFAIf a putative class of plaintiffs, all citizens of State A, sues a corporate defendant, which the law considers to be a citizen of State A and State B, in state court, may the defendant remove the case to federal court under the Class Action Fairness Act (CAFA)? Recently, the Sixth Circuit became the third court of appeals to answer “no.”

CAFA, 28 U.S.C. § 1332(d), provides for federal jurisdiction over class actions involving at least 100 class members, with $5 million or more at stake, and in which “any member of a class of plaintiffs is a citizen of a State different from any defendant.” Unlike diversity jurisdiction in most other contexts, CAFA allows minimal diversity—as long as one plaintiff maintains citizenship in a state different from one defendant’s citizenship, diversity is satisfied, regardless of where all other parties reside. Frequently, diversity under CAFA is straightforward. If one plaintiff resides in California and one defendant resides in Tennessee, the case passes muster. In contrast, a class of plaintiffs from one state facing a defendant from the same state cannot satisfy even minimal diversity.

Sometimes, however, the nature of corporate citizenship creates a hybrid situation. Under § 1332(b), a corporation is a citizen of both its state of incorporation and the state where it maintains its principal place of business. Defendants in the Sixth, Fourth, and Eleventh Circuits have argued that minimal diversity exists within the meaning of CAFA when one of these places aligns with the citizenship of a class of plaintiffs but the other does not. The intent of CAFA to expand federal jurisdiction beyond the traditional confines of complete diversity is often relied upon in support of this argument. Under this “alternative-citizenship” theory of diversity, the corporation can pick between citizenship in one state or the other to either satisfy or defeat minimal diversity under CAFA.

Unfortunately for removing defendants, the theory has failed thus far in each of the three courts of appeals to squarely address it. The reasoning in each court follows similar lines: First, they say, the text of § 1332 is clear—a corporation is a citizen of its place of incorporation and where it maintains its principal place of business, not either-or. Second, the courts have reasoned, allowing jurisdiction based on the alternative-citizenship theory would not comport with the historical purpose behind federal diversity jurisdiction—to protect an out-of-state litigant from prejudice within a court in the opposing party’s home state. The Sixth Circuit’s opinion even suggests that the alternative-citizenship theory would push the limits of Article III. If that is right, even express Congressional legislation would not make the alternative-citizenship theory effective.  And unless and until another Circuit rules differently, this issue is not likely to reach the Supreme Court for clearer resolution.