One question that tends to arise in insurance class actions and other consumer class actions is whether a defendant can avoid class treatment by voluntarily providing relief to the proposed class. The risks of doing that include the possibility that the litigation will continue because the plaintiffs’ lawyers will argue that the relief provided is somehow insufficient, or the plaintiffs’ lawyers will request a large attorneys’ fee award on the grounds that the case they filed purportedly resulted in the defendant’s voluntary decision to provide relief.
The Seventh Circuit’s recent opinion in In the Matter of Aqua Dots Prods. Liab. Litig., 2011 U.S. App. LEXIS 17039 (7th Cir. Aug. 17, 2011) (Easterbrook, J.) addresses this issue. The case involved a children’s product that, because of an incorrect ingredient used by a supplier, was toxic. Upon discovery of the problem, the defendant immediately recalled the product and provided exchanges or refunds. The plaintiffs sued, challenging the adequacy of the recall program. Id. at *1-2. The district court denied class certification on superiority grounds, finding that consumers would be better off returning the product than they would be by litigating a class action, which would incur substantial costs for attorneys’ fees and notice. Id. at *4-5.
The Seventh Circuit concluded that the district court properly denied certification, but did so for the wrong reason. It explained that, in its view, the superiority subsection of Rule 23(b)(3) only permits a comparison between a class action and other forms of “adjudication” (such as small claims court), not between a class action and other forms of non-litigation relief. Id. at *6-7. The Seventh Circuit held, however, that the district court should have denied class certification on adequacy grounds, explaining that:
[T]he district court should have relied on the text of Rule 23(a)(4), which says that a court may certify a class action only if “the representative parties will fairly and adequately protect the interests of the class.” Plaintiffs want relief that duplicates a remedy that most buyers already have received, and that remains available to all members of the putative class. A representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.
. . .
The per-buyer costs of identifying the class members and giving notice would exceed the price of the toys (or any reasonable multiple of that price), leaving nothing to be distributed. The principal effect of class certification, as the district court recognized, would be to induce the defendants to pay the class’s lawyers enough to make them go away; effectual relief for consumers is unlikely.
Id. at *7-10 (emphasis added).
The key takeaway I see here is that voluntarily providing relief to the putative class may be enough to defeat class certification, in appropriate cases. While there are risks to doing that, it is an option worth considering in some cases, especially where the company sees a substantial benefit from a business and public relations perspective to taking that approach.