A recent Texas Supreme Court decision in a class action caught my eye because it addressed several significant class certification issues, including one that I’ve seen regularly and another that the court analyzed in a new and different way. First, the court held that a named plaintiff does not have standing to seek injunctive relief where the possibility of imminently sustaining a similar future injury is speculative. Second, standing can pose a predominance problem—the court held that “the predominance requirement cannot be met when, from the outset, it is clear that substantial variation exists among the class regarding standing.” Third, a named plaintiff with an “atypically strong” claim may not satisfy the typicality requirement.

In USAA Casualty Insurance Co. v. Letot, No. 22-0238, – S.W.3d –, 2024 WL 2490521 (Tex. May 24, 2024), the plaintiff owned a vintage Mercedes sedan that was rearended by another driver. She made a third-party claim with the other driver’s insurer. The insurer concluded the vehicle was a total loss, promptly issued a check to the plaintiff for the vehicle’s pre-loss value, and notified the Texas Department of Transportation (“DOT”) that the vehicle was salvage (meaning it could not be driven on public roads or sold without obtaining a salvage title). The plaintiff disagreed with the total loss determination and with the insurer’s notification to the DOT. She later brought a putative class action alleging that the insurer should not notify the DOT before a vehicle owner accepts the proposed payment. Skipping over some other procedural history not pertinent to this decision, the trial court ultimately certified a class seeking both injunctive relief and damages, and the court of appeals affirmed. The Texas Supreme Court reversed.

First, the Texas Supreme Court held that the named plaintiff did not have standing to seek injunctive relief, but she had standing to seek damages. Texas law on standing appears to largely mirror federal law. The court explained that a past injury can be sufficient for standing only if it is “quite likely that [the plaintiff] will go through the same experience again.” Here, the plaintiff could encounter the same problem only if she experienced another accident in which the other driver was responsible and was insured by the same insurer. The court explained that this was the same risk that anyone else in the general public would face and was thus insufficient to confer standing. On top of that, the same issue would arise again only if the insurer determined there was a total loss, made the same report to the DOT, and the plaintiff disagreed. All of this was too speculative to confer standing to seek injunctive relief. But the plaintiff adequately alleged a damages claim based on the alleged impact of the report to the DOT.

Second, in addressing class certification, the Texas Supreme Court concluded that the predominance requirement was not satisfied because “standing itself poses a threat to predominance” by necessitating “highly individualized inquiries.” Some class members would want the insurer to expedite the payment of their claim and would not object to notifying the DOT. While the Texas Supreme Court did not decide whether every class member must have standing (an open question in federal courts at the U.S. Supreme Court level), it concluded that where standing would be a highly individualized question, a class could not be certified. This holding is potentially helpful to defendants in other contexts, such as data breach cases where standing is often highly individualized.

Third, the named plaintiff’s claim failed the typicality requirement because it was “atypically strong” – she had good (but unusual) reasons why she did not want her vintage car declared a total loss and had persuaded the insurer to try to withdraw its notice to the DOT. This is a good example of why selecting a “strong” class representative can sometimes backfire for plaintiffs’ counsel.

Overall, this case presents several potentially useful strategies for defense counsel: (1) defending against an attempt to certify an injunctive relief class on the ground that the potential for the named plaintiff to suffer a future injury is speculative; (2) focusing on the individualized nature of standing determinations for class members in challenging the predominance requirement; and (3) recognizing that an “atypically strong” named plaintiff may be an inappropriate class representative.

Suppose that the central issue in a putative class action is a legal issue pending before the Supreme Court. Depending on how the Supreme Court rules, the plaintiffs will recover either nothing or up to $600 million. But rather than rolling the dice and waiting for that decision, the parties agree to a class action settlement that can only work if it’s approved before the decision is issued. Conceptually that seems like something parties should be able to do. Settlements often happen because the defendant doesn’t want to risk being held liable for a huge exposure, and plaintiffs don’t want to risk being left empty handed. But litigation takes time, and if there are objections to the settlement and an appeal, that will all occur after the merits issue is decided. At that point, the deal will look much better or worse for one side. A recent decision from the Eleventh Circuit provides several lessons for lawyers negotiating class settlements and presenting them to a district court for its approval.

In Drazen v. Pinto, No. 21-10199, 2024 WL 2122466 (11th Cir. May 13, 2024), the plaintiffs alleged that the defendant violated the Telephone Consumer Protection Act (TCPA) by using an autodialer to make telephone calls and send text messages. The parties agreed to a claims-made settlement of up to $35 million in cash and vouchers for those class members who made claims, with up to $10.5 million for attorney’s fees. The district court granted preliminary approval. Shortly after notice was emailed to the class, the Supreme Court granted certiorari to decide whether a device must have certain capabilities to constitute an autodialer under the TCPA. If the Supreme Court ruled for the defendant, the Drazen case would be worthless, and if it ruled for the plaintiff, the claims would be worth potentially up to $600 million. Several months after final approval of the settlement, the Supreme Court decided the issue in favor of the defendant.

Judge Tjoflat’s opinion vacating the approval of the settlement is lengthy. Here is what I found most significant for purposes of parties seeking approval of future settlements:

  1. Sufficient Notice to Class Members of Attorney’s Fees Motion: The schedule proposed by the parties and adopted by the district court provided class members with only 7 days to review the attorney’s fees motion before the objection deadline, and the notice did not specify when that motion would be filed.  The opinion strongly criticized this timing.
  2. Notice of “the Class Claims, Issues or Defenses”: The court held that this requirement is conjunctive and required notice to the class members of not merely the claims asserted but also the issue pending before the Supreme Court and how its decision would impact the case. The Eleventh Circuit opinion suggested that a supplemental notice should have been issued regarding this development.
  3. Opt-Out Requests: The court of appeals took issue with the parties requiring that class members seeking to opt out submit a detailed letter under penalty of perjury.
  4. Release: The opinion takes issue with what it refers to as an “overbroad release,” pointing to language that released the defendant’s “past and present parents, predecessors, successors, affiliates, holding companies, subsidiaries, employees, agents, attorneys, board members, assigns, partners, contractors, joint venturers or third-party agents with which it has or had contracts, and/or their affiliates.” This type of language in large part is fairly standard. It’s hard to imagine a defendant settling a class action while leaving open potential claims against its affiliated entities, officers, and employees. The district court interpreted the release as limited to claims that were made or could have been made in the lawsuit, although Judge Tjoflat’s opinion indicated that the district court improperly “amended” the settlement agreement in reaching that conclusion.
  5. CAFA’s Coupon Settlement Provisions: The settlement provided class members with an option of either $35 in cash or a $150 voucher redeemable for any of the defendant’s products and services and freely transferable. The Eleventh Circuit held that this was a “coupon settlement” subject to stricter requirements for approval under the Class Action Fairness Act (CAFA), ruling in essence that any credit or discount on the defendant’s goods or services is a “coupon.” If you want to avoid this, the best approach would be an all-cash settlement.
  6. Attorney’s Fees: In a “coupon settlement” under CAFA, attorney’s fees for class counsel may be based on the value of the coupons that were redeemed, the lodestar method, or both. Only 1.9% of class members made claims, valued at approximately $2.3 million. The district court awarded a $7 million fee (20% of the $35 million potentially available if all class members made claims), where the lodestar amount was approximately $2.8 million. In vacating the settlement, the court of appeals explained that in “many cases” the district court should wait until after the coupons’ expiration date to decide on attorney’s fees, although a district court may estimate a redemption rate and receive expert testimony for that purpose. Here, the district court erred by basing the attorney’s fees on a percentage of the total amount potentially available to class members rather than the much smaller amount of relief obtained.

Ultimately, this case goes back to the district court, and it is unclear what will happen. The district court might only reduce the attorney’s fees or disapprove the settlement. Given the outcome on the merits issue in the Supreme Court, the defendant would obviously be pleased if the settlement is disapproved because it will prevail on the merits. But the deal was structured so that the parties could hedge their bets on the merits. In any event, the parties likely could have avoided some or all of the issues identified above in preparing the settlement documents and seeking approval of the settlement.

It is worth noting that two of the three judges on the panel filed a concurring opinion stating that they would have addressed only the coupon settlement and attorney’s fees issues. So, the remainder of the opinion, which appears to be the opinion of only Judge Tjoflat, may not carry the typical weight of a regular full panel opinion.

When a class certification decision overlaps with merits issues, can a court of appeals deciding an interlocutory appeal from a class certification order also review an earlier decision on a motion to dismiss if it was integral to the class certification order? Yes, according to a new Fourth Circuit decision.

Elegant Massage, LLC v. State Farm Mutual Automobile Insurance Company, No. 22-1853, – F.4th –, 2024 WL 995480 (4th Cir. Mar. 8, 2024), is one of many cases brought against property insurers seeking coverage for business income losses arising from the COVID-19 pandemic. With near unanimity, these lawsuits have been dismissed on Rule 12 motions and almost all those dismissals have been affirmed on appeal. But here the district court denied a motion to dismiss and declined to certify that ruling for interlocutory appeal under 28 U.S.C. § 1292(b). It later certified a class of the defendant’s commercial property insurance policyholders in Virginia that were affected by COVID-19 government orders and whose insurance claims were denied. The Fourth Circuit granted the insurer permission to appeal the class certification order under Rule 23(f).

When the case reached the Fourth Circuit, that court had previously affirmed the dismissal of a similar case under West Virginia law. The insurer asked the Fourth Circuit to review the earlier ruling on its motion to dismiss in addition to the class certification order. The Fourth Circuit majority held that it could review the motion to dismiss decision under its pendent appellate jurisdiction. Under that circuit’s jurisprudence, it can exercise pendent appellate jurisdiction if the rulings are ”so interconnected” that “either (1) an issue is inextricably intertwined with a question that is the proper subject of an immediate appeal, or (2) review of a jurisdictionally sufficient issue is necessary to ensure meaningful review of an immediately appealable issue.” (Cleaned up.) The second of those two alternative prongs applied here.  The district court’s ruling on the motion to dismiss was relied upon in its class certification decision, and “was integral to the district court’s later conclusion that the class members could prove their claims through evidence common to the class.” Because the court of appeals could not “meaningfully review the class certification order” while ignoring its own recent decision on the insurance coverage issues that were the subject of the motion to dismiss ruling, pendent appellate jurisdiction was appropriate. The Fourth Circuit then applied its recent decision on the merits issues, finding Virginia law functionally the same as West Virginia law. It therefore reversed both the motion to dismiss and class certification orders, remanding with direction to dismiss the entire case.

Judge Wynn concurred in the reversal of the class certification order, but otherwise dissented. He disagreed with the majority’s finding of pendent appellate jurisdiction, concluding that such jurisdiction should be exercised only in “exceedingly rare circumstances.” He would have reversed the class certification order because, even assuming the district court correctly found the possibility of coverage for the claimed losses, this “would require an individual review of each denied claim to determine whether the loss of business income claimed was due to the [COVID-19] executive orders or to another cause.” He noted that the named plaintiff had “business troubles [that] long predated COVID-19” and had closed before the government orders took effect.  His opinion suggests that he would exercise pendent appellate jurisdiction in this procedural posture only if it would be “impossible” to review the class certification order without reviewing a motion to dismiss decision. He expressed concerns that the majority opinion might unduly open the door to defendants seeking review of merits issues on class certification appeals.

The majority’s opinion puts the Fourth Circuit in line with other circuits. Often courts of appeals have ruled on a merits issue simply because it formed part of the analysis of the class certification issues, without finding it necessary to rely on pendent appellate jurisdiction. See, e.g., Van v. LLR, Inc., 61 F.4th 1053, 1065 (9th Cir. 2023); In re State Farm Fire & Cas. Co., 872 F.3d 567, 572-73 (8th Cir. 2017); Regents of the Univ. of Cal. v. Credit Suisse First Boston, 482 F.3d 372, 381 (5th Cir. 2007).

Think twice about whether the Class Action Fairness Act’s “local controversy” exception applies to your case. Even if more than two-thirds of the proposed class members are citizens of the forum state, there is a significant in-state defendant and the claims asserted arise from conduct in that state, that is not necessarily enough for the plaintiffs to avoid CAFA jurisdiction under a new Fifth Circuit decision. Under this decision, if any of the putative class members’ injuries occurred outside of the forum state, the “local controversy” exception does not apply. This decision could enable defendants to remove some single-state putative class actions that might have been thought unremovable under the “local controversy” exception. And, as the Fifth Circuit also concluded, a denial of remand on this issue was appealable as of right.

The “local controversy” exception provides that a federal district court “shall decline” jurisdiction over a putative class action if more than two-thirds of the proposed class are citizens of the state where suit was filed, at least one defendant is a citizen of that state and satisfies certain requirements, and no other class action “asserting the same or similar factual allegations” against any defendant has been filed during the prior three years. 28 U.S.C. § 1332(d)(4). The additional requirements to qualify as an in-state defendant are that the defendant is one “from whom significant relief is sought by members of the plaintiff class,” “whose alleged conduct forms a significant basis for the claims asserted by the proposed plaintiff class,” and “principal injuries arising from the alleged conduct or any related conduct of each defendant were incurred in the State in which the action was originally filed.” Id. (emphasis added). A lot of lawyers likely assumed that this exception would apply if more than two-thirds of the class are citizens of the forum state and their injuries (but not every single class member’s injury) were suffered in that state. Not so, according to a new Fifth Circuit decision.

In Cheapside Minerals, Ltd. v. Devon Energy Production Co., L.P., Nos. 23-40591, 24-40026, – F.4th –, 2024 WL 886951 (5th Cir. Mar. 1, 2024), the plaintiffs sued for underpayment of oil-and-gas royalties on Texas properties. As you might expect, more than two-thirds of the proposed class members were Texas citizens, but some class members were citizens of other states and the United Kingdom. The defendant successfully argued that that the “principal injuries” requirement means that all putative class members must have suffered their injuries in Texas for the exception to apply. The Fifth Circuit reasoned that the word “principal” means “primary” or “chief,” that “CAFA ties the ‘principal injuries’ sustained to the entire class, not just a subset of it,” and that “[t]here is no exception for cases in which most plaintiffs sustain the principal injury in the forum state but some do not.”  (Emphasis in original.) The court found support for its interpretation in other sections of CAFA that were more specific about how you count class members for certain purposes. The court also concluded that the exception must be construed narrowly. The court noted that CAFA’s legislative history appeared to be inconsistent with the court’s ruling, but found no ambiguity in the statute and therefore did not consider the legislative history.

Given that the only injury in this case was a financial harm, the court concluded that the injuries occurred wherever the class members resided. Because some putative class members were not Texas citizens, the local controversy exception did not apply.

Notably, this decision did not address the mandatory exception to CAFA jurisdiction applicable where “two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed.” 28 U.S.C. § 1332(d)(4)(B).

The Fifth Circuit also agreed with the Eighth and Eleventh Circuits (see my blog post about the Eleventh Circuit decision) that an order remanding a case based on the “local controversy” exception is a remand based on “abstention principles” that is appealable as of right, without the need to petition for permission to appeal under CAFA.  

Overall, this decision seems likely to result in an increased number of single-state class actions being removable to federal court, at least in the Fifth Circuit. It might not be too late to remove such cases where the complaint did not clearly plead an amount in controversy over the $5 million threshold. See, for example, Cutrone v. Mortgage Electronic Reg. Sys., Inc., 749 F.3d 137, 145 (2d Cir. 2014) (blog post).

In today’s world nearly everyone’s name, address and various other pieces of arguably personal information reside on many companies’ computer servers. Sharing of such information between companies has resulted in countless class action suits, in many of which the alleged harm is negligible at best. The Supreme Court’s decision on Article III standing in TransUnion LLC v. Ramirez, 594 U.S. 413 (2021) (my blog post), set some ground rules for these types of suits. It has led to extensive debate in the lower courts regarding how to apply the Court’s test in cases alleging invasion of privacy. The Third Circuit recently weighed in, with the majority of the panel concluding that the fact that information was passed on to a single third-party vendor for a ministerial purpose was insufficient to establish standing.

In Barclift v. Keystone Credit Services, LLC, No. 22-1925, – F.4th –, 2024 WL 655479 (3d Cir. Feb. 16, 2024), the plaintiff sued under the Fair Debt Collection Practices Act (FDCPA), alleging that the defendant debt collector violated the FDCPA by providing certain information to a third-party mailing vendor for the purpose of sending the plaintiff a debt collection letter. The plaintiff alleged that this purportedly “caused her embarrassment and stress, invaded her privacy, and inflicted reputational harm.” The plaintiff further alleged that the vendor maintained such data electronically for years, and had once had a data breach (unrelated to her information). The district court held that this was insufficient to establish standing, and the Third Circuit affirmed in a 2-1 decision.

The only issue in dispute was whether, for purposes of standing, the plaintiff had alleged an “injury in fact,” which must be “concrete and particularized.” The Third Circuit explained that “intangible harms can give rise to concrete injuries when they bear ‘a close relationship to harms traditionally recognized as providing a basis for lawsuits in American courts,’ such as ‘reputational harms, disclosure of private information, and intrusion upon seclusion.’” In applying this rule, the courts of appeals have applied one of two approaches: (1) an ”element-based approach,” focused on whether the plaintiff alleged all of the elements of a common law tort; or (2) a harm-based approach, focused on “compar[ing] the kind of harm a plaintiff alleges with the kind of harm caused by the comparator tort.” The Third Circuit adopted the harm-based approach as more closely in line with TransUnion.

Applying the harm-based approach, the Third Circuit held that “[i]nformation transmission that neither travels beyond a private intermediary nor creates a sufficient likelihood of external dissemination cannot compare to a traditionally recognized harm that depends on the humiliating effects of public disclosure.” The court further concluded that “the mere assertion that [the vendor’s] employees could access and broadcast [plaintiff’s] personal information to the public is far too speculative to support standing.”

This decision will be helpful to defendants faced with the wave of privacy suits. The debate about where to draw the line, however, will undoubtedly persist. Judge Matey dissented in large part, first criticizing TransUnion, then agreeing with the majority that the harm-based approach was the correct standard, but applying it differently in this case. The dissent would have held that the common law tort of disclosure of private information historically would have found a violation even if the disclosure was to a third party performing a ministerial role, such as a stenographer.

When class certification is denied because the named plaintiff’s claim fails for some reason, sometimes an absent class member will try to intervene rather than filing their own separate suit. Their goal is usually to attempt to certify a class for a longer time period than would otherwise be possible.  If the new plaintiff files a new suit, the statute of limitations period for the proposed class claims would be shorter than if they join a suit that was pending for years. The Sixth Circuit recently addressed this issue, holding that the proposed intervenor could not demonstrate that his rights would be impaired without intervention because he could bring his own separate suit.

Grainger v. Ottawa County, – F.4th –, 2024 WL 64093 (6th Cir. Jan. 5, 2024), is one of various cases seeking to recover against counties or municipalities that foreclosed on properties for nonpayment of taxes and then kept proceeds exceeding the amount owed. (For more background, see my blog post on another Sixth Circuit case involving this issue and the juridical link doctrine.) The district court denied class certification under the Supreme Court’s decision in China Agritech, Inc. v. Resh, 138 S. Ct. 1800 (2018) (see my blog post). Under that decision, the named plaintiff (Grainger) could rely on the pendency of an earlier class action to toll the statute of limitations on his individual claims, but Grainger could not “piggyback” on that earlier class action to bring another class action where, absent class action tolling, his individual claims would have been untimely. Three days later, a new proposed plaintiff (Behovitz) who had a timely claim because his foreclosure proceeding was more recent in time, moved to intervene in Grainger’s case. For various reasons, the district court denied both intervention as of right and permissive intervention.

The Sixth Circuit affirmed, focusing on two of the four requirements for intervention: (1) whether Behovitz had a “substantial interest” in the subject matter of the case; and (2) whether his ability to protect his interest may be impaired without intervention. Behovitz argued that he had a substantial interest in seeking to pursue class claims. The Sixth Circuit concluded that this “likely does not” constitute a sufficient interest to warrant intervention after denial of class certification, noting that “carrying Behovitz’s argument to its logical endpoint could result in ‘multiple bites at the certification apple’ for class counsel” in a manner that seemed improper, but the court declined to decide the case on that basis. Instead, the Sixth Circuit ruled based on the impairment requirement, holding that Behovitz could not demonstrate impairment because he was entitled to bring his own separate suit, which would be timely, and could allege class claims (albeit for a shorter time period). To the extent Behovitz was concerned about a class action settlement that had been approved in another case, his remedy was to appeal that decision or opt out.

The Sixth Circuit also held that the district court did not abuse its discretion in denying permissive intervention. Allowing intervention would further delay the case and potentially require adding more plaintiffs who had properties in other counties, or relitigating issues about whether Behovitz could represent putative class members in counties where his property was not located.

Grainger may aid defendants in seeking to fend off or narrow the scope of successive class actions.

In analyzing class certification issues, courts have said that common issues may predominate in some cases even though damages would have to be determined individually for each class member. But what about where some class members have no damages? Recent federal appellate decisions have said that situation presents an issue of liability, not damages. A subtle distinction, but one that can make all the difference. Where liability cannot be determined class-wide, courts have held that the predominance requirement is not satisfied.

Sampson v. United Services Automobile Association, — F.4th –, 2023 WL 6533181 (5th Cir. Oct. 6, 2023), is one of a series of cases brought against auto insurers challenging how they value vehicles that are total losses. The plaintiffs alleged that the insurer’s use of a software product called CCC violated a Louisiana statute because CCC was not a “generally recognized motor vehicle industry source” within the meaning of the statute. The district court certified a class, and the Fifth Circuit agreed to hear an interlocutory appeal from that ruling.

In seeking class certification, the plaintiffs proposed to use National Automobile Dealers Association (NADA) guidebook values, although there were other options that undisputedly would comply with the statute, including Kelley Blue Book (KBB). The insurer presented evidence that 9.2% of claims were valued less than the NADA value, but above the KBB value, so if KBB was chosen, there would be no recovery. The Fifth Circuit vacated the class certification decision, agreeing with a Ninth Circuit decision in a similar case last year (see my blog post here), which held that where vehicles would have to be valued individually, and on some claims there would be no injury, the predominance requirement for class certification was not satisfied. The Fifth Circuit explained that “a district court’s wide discretion to choose an imperfect estimated-damages model at the certification stage does not carry over from the context of damage to the context of liability.” Where the plaintiffs’ evidence could not establish liability (injury) on a class-wide basis, that was insufficient.

A recent Ninth Circuit decision highlights the importance of the defendant clearly pleading the basis for alleging the amount in controversy in a notice of removal under the Class Action Fairness Act (CAFA). In this case, after the defendant prevailed on a summary judgment motion and the plaintiff appealed, the Ninth Circuit vacated and remanded for the district court to determine the amount in controversy.

In Moe v. GEICO Indemnity Co., — F.4th –, 2023 WL 4483690 (9th Cir. July 12, 2023), the plaintiff filed a putative statewide class action in Montana against GEICO. He alleged that GEICO improperly failed to pay him, and other third-party claimants injured in accidents for which GEICO drivers were determined to be responsible, collection fees and interest on medical bills, and lost wages. In removing to federal court, GEICO’s notice of removal relied on a declaration from an employee stating “that he ‘generated data and can state that the claims paid by GEICO Indemnity Co., and the damage exposure, not liability, to the potential members of the putative class proposed by Plaintiff exceeds the sum or value of $5 million in the aggregate.’” No further explanation of the data and no calculations were provided. At the district court level, neither the plaintiff nor the district court challenged the propriety of removal. The district court granted summary judgment on the named plaintiff’s claim, and he appealed.

On appeal, the Ninth Circuit questioned sua sponte whether the $5 million threshold for the amount in controversy was satisfied. While the Supreme Court has held in Dart Cherokee Basin Operating Co. v. Owens, 574 U.S. 81 (2014), that evidence supporting the amount in controversy is not required to accompany a notice of removal, a “plausible assertion of the amount at issue” is required. Here, the Ninth Circuit found GEICO’s notice of removal and accompanying declaration to be lacking. It explained that the plaintiff’s “claimed damages in his individual claim are under $1,000,” “there is little indication what the average amount of damages the purported class members may have suffered,” and “it is unclear how large the purported class may be.” 2023 WL 4483690, at *3. The Ninth Circuit therefore vacated the summary judgment ruling (without addressing its merits), and remanded for the district court to determine whether the amount in controversy requirement was satisfied.

As I see it, a key practice pointer here for defense counsel is to include enough allegations in the notice of removal (and if desired, although not required, an accompanying declaration) to demonstrate how the amount in controversy is being estimated. Here, a conclusory assertion that data existed to support it was not enough. Some specifics as to the nature of the data and what it reflected might have been enough to avoid a remand, and then presumably another appeal. Sometimes it can be helpful to offer the court more than one method of calculation.

A recent Ninth Circuit decision clarified that the benefit to the class is the “touchstone for determining the reasonableness of attorneys’ fees in a class action.” Under this decision, the fee should not be based on the maximum potential class recovery (as some courts have held for many years), or a lodestar amount that bears no relationship to the actual class recovery. It will be interesting to see how this decision impacts settlement negotiations in putative class actions in the Ninth Circuit and beyond.

In Lowery v. Rhapsody International, Inc., — F.4th –, 2023 WL  3857499 (9th Cir. June 7, 2023), a putative class action was filed against a music streaming service, Rhapsody, on behalf of copyright owners whose music was played on the service without a license. About 98% of the putative class members accepted a settlement that was negotiated with the National Music Publishers Association outside of this case, leaving a small number of putative class members remaining. A settlement of this putative class action was negotiated early in the case. Under the terms of the settlement, putative class members were required to make claims to receive compensation, and the total amount potentially available was $20 million. But because so few claims were made (in large part because of the prior settlement), Rhapsody paid only $52,841.05 to the putative class. The plaintiffs’ attorneys nevertheless claimed $2.5 million in fees on a lodestar basis. A magistrate judge recommended a fee award of $860,000 but the district judge rejected that and awarded $1.7 million. These numbers surprise me given what the opinion says about how the settlement was reached early in the case, with most of the efforts focused on negotiating the settlement, not litigation activities. But the opinion doesn’t delve into how those large lodestar numbers were reached.

The Ninth Circuit reversed, instructing the district court on remand to determine the “actual value to the class members and then award attorneys’ fees proportional and reasonable to the benefit received by the class.” The court explained that “courts must consider the actual or realistically anticipated benefit to the class—not the maximum or hypothetical amount—in assessing the value of a class action settlement.” While a lodestar cross-check was appropriate, where the lodestar amount “will greatly exceed 25% of the value of the settlement … that is a major red flag that signifies that lawyers are being overcompensated and that they achieved only meager success for the class.” The court emphasized that “[t]he key factor in assessing the reasonableness of attorneys’ fees is the benefit to the class members.” The court noted that there may be some circumstances where other factors come into play, such as civil rights cases or even some copyright cases where there is a societal benefit or “substantial nonmonetary relief.” 

This is arguably something of a sea change for class action settlements. For many years, courts have regularly approved attorneys’ fee awards based on the maximum potential recovery. Some judges or commentators might assume that this will simply result in plaintiffs’ attorneys accepting lower compensation in lower value cases. But such deals are never easy to negotiate. The plaintiffs’ bar tries to get the same or better hourly rates as the defense bar. Will defendants be forced to pay more because that is the only way a settlement can be reached? Or will defendants force more cases through class certification, summary judgment or trial? Or will there be more settlements that include no agreement on the fee, instead having the court decide the fee on a disputed application? That can be risky for the defendant, but maybe not so much now in the Ninth Circuit. Will nonmonetary relief be negotiated and relied upon more often in seeking settlement approval? In my mind, all of these may happen depending on the circumstances of the case.

Federal courts of appeals have disagreed on whether a named plaintiff in a proposed class action can sue defendants who have not injured that plaintiff but allegedly have injured putative class members.  This is not an uncommon scenario. Plaintiffs often attempt to bring putative class actions that are broader than their own claims, suing defendants that did not injure them. The Sixth Circuit recently weighed in on this issue, rejecting the “juridical link” doctrine and holding that a named plaintiff has no standing to sue a defendant that did not injure that plaintiff. This is a thorough opinion that will be useful for defendants on this issue.

In Fox v. Saginaw County, – F.4th –, 2023 WL 3143922 (6th Cir. Apr. 28, 2023), a Michigan County foreclosed on the plaintiff’s property because he failed to pay property taxes. The county sold the property for much more than the amount of back taxes owed but the plaintiff did not receive any of the surplus. In other litigation, this practice has been held to be an unconstitutional taking. (Coincidentally, the U.S. Supreme Court heard oral argument on Friday regarding whether an essentially-identical practice in Minnesota is unconstitutional, with SCOTUSblog reporting that the justices appeared inclined to rule for the homeowner). The plaintiff in this case sued not only the county that had taken his property but also 26 other Michigan counties that allegedly had harmed putative class members in substantially the same manner. The district court certified that entire class, and the Sixth Circuit accepted an interlocutory appeal under Rule 23(f).

The Seventh Circuit has held that under the “juridical link” doctrine a proposed class representative can sue defendants that did not injure the class representative if the class members would have standing and the named plaintiff can otherwise satisfy the requirements for class certification. But the Second and Eighth Circuits have rejected that theory (see my blog post on the Second Circuit decision).

In Fox, the Sixth Circuit addressed this issue thoroughly, rejecting the “juridical link” doctrine as contrary to Supreme Court precedent for three reasons. First, the Supreme Court has generally rejected the notion that standing should be evaluated differently in a putative class action as compared with an individual suit, requiring that named plaintiffs establish a personal, individual injury and generally limiting the scope of any class claims consistent with the named plaintiff’s claim. Second, given that standing must be established at the outset of litigation before a class has been certified, logically standing cannot depend on injuries to putative class members that are not yet parties when the case is brought. Third, the efficiency rationale for the “juridical link” doctrine cannot override the separation-of-powers rationale for Article III standing requirements.

Given the Supreme Court’s decisions looking to historical practice in evaluating standing issues, the Sixth Circuit’s opinion included an interesting discussion of some of the historical predecessors of the modern class action in English courts, including “bills of peace,” whereby, for example, “[t]he named tenants of a manor might represent all of the tenants in a dispute against the manor’s lord over hunting rights on manorial lands.” This did not support the “juridical link” doctrine because no historical evidence was found of “bills of peace in which, say, named tenants sued not just the lord of their own manor on behalf of their cotenants but also the lords of all other manors.”

The Sixth Circuit also noted some problems that might be encountered on remand. While the plaintiff might be able to find 26 other named plaintiffs from the other counties to join him, thereby avoiding the standing problem, he would face other obstacles that the district court had not addressed. Proving the fair market value of every putative class member’s property could potentially overwhelm any common questions. The district court also would have to address whether individualized defenses could be litigated in a manageable way, and how mortgages and other liens would be addressed. If class certification were sought again, the district court would have to “forecast how the parties will conduct the litigation from the certification stage through the trial to the final judgment.”