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.

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.