Last week the Second Circuit issued a new decision affirming, with one exception, the approval of a $5.6 billion revised class action settlement in the long-running Visa/Mastercard antitrust litigation. (See my blog post on the Second Circuit’s reversal of a prior settlement in 2016.)  The opinion and two concurrences in Fikes Wholesale, Inc. v. HSBC Bank USA, N.A., — F.4th –, 2023 WL 2506455 (2d Cir. Mar. 15, 2023) addressed various issues, two of which I’ll discuss here.    

First, objectors to the settlement challenged service awards to the named plaintiffs totaling $900,000, including two awards of $200,000 each, approximately 100 times the amount they would get as part of the settlement. I don’t think I’ve seen a case with service awards anywhere near that high, but this settlement was obviously of extraordinary size. The majority opinion concluded that named plaintiff awards were “likely impermissible” under a Supreme Court decision from 1881. In that case, which long predates the creation of the modern class action, the Supreme Court concluded that a creditor bringing suit on behalf of others could not be compensated for services and expenses in bringing suit. In 2020, the Eleventh Circuit held that the Supreme Court decision precluded the use of named plaintiff service awards in class actions (see my blog post) but other circuits have disagreed (see, for example, my summary of a Ninth Circuit decision on this issue). In Fikes Wholesale, the Second Circuit panel concluded that, while it agreed with the Eleventh Circuit, it was bound by two prior Second Circuit decisions upholding named plaintiff awards, although without analyzing the old Supreme Court case in any detail. We might well see a petition for rehearing en banc (but those are very rarely granted in the Second Circuit) or a petition for certiorari to the Supreme Court on that issue. The Second Circuit did find the service awards to be excessive in one respect—to the extent the amount awarded was based on work performed by the plaintiffs lobbying for legislative reform, the district court was instructed to reduce the award accordingly.  

From the defense perspective, I’m not sure there is much that can be done here other than to negotiate the best deal you can, and have a provision in the settlement agreement that the amount of the award is solely in the district court’s discretion and if a lower amount (or even nothing) is awarded, the settlement remains fully enforceable.

Second, in Fikes Wholesale, objectors challenged the fairness of the settlement for newer merchants, who would get minimal monetary payments but release their claims going forward for five years into the future. The Second Circuit declined to reach this issue because the settlement agreement had a severability provision stating that the release “extend[s] to, but only to, the fullest extent permissible by federal law.” So even if part of the release was not enforceable, the settlement remained fully enforceable. The question of whether the release of future claims is enforceable will have to be decided in a future case, when a new suit is filed and then one or more defendants seek to enforce the release.

The release language here is an interesting technique that might be worth considering in some class action settlements. It prevented a possible (and it appears serious) concern about the scope of the release from derailing the enforceability of this settlement. But the defendants will likely have to deal with that in future litigation, and Judge Jacobs’s concurrence casts doubt on whether the release of future claims will be enforceable as to the newer merchants. Defendants trying to buy complete peace in entering into a class settlement may not want to agree to this type of severability clause and leave an issue like that for another day.

A recent Ninth Circuit decision illustrates how defendants can use evidence on an individualized defense to potentially defeat class certification.

In Van v. LLR, Inc., — F.4th –, 2023 WL 2469909 (9th Cir. Mar. 13, 2023), the defendant allegedly charged sales tax that was not owed by Alaska purchasers on online purchases. While the defendant later refunded the amounts, it did not pay interest on the amounts refunded. The Ninth Circuit concluded that, even if this interest was a fraction of a cent for some class members, that was sufficient for Article III standing. However, the Ninth Circuit vacated and remanded the district court’s certification of the class because the defendant had introduced evidence of eighteen examples of discounts to class members that offset the sales tax. Given that a total of 13,680 class members had received discounts, “an inquiry into the circumstances and motivations behind each of the 13,680 discounts might be necessary … which could potentially involve up to 13,680 depositions and months of trial.”

The Ninth Circuit explained that “[w]hen a defendant substantiates such an individualized issue in this way,”  in evaluating predominance, “the district court must determine … whether a class-member-by-class-member assessment of the individualized issue will be unnecessary or workable.”

This case is a good example of how a defendant can potentially defeat class certification by developing, through analysis of its own records, an individualized defense to a substantial number of putative class members’ claims.

A sometimes-overlooked aspect of class action law is how class certification rules interact with the Rules Enabling Act, which provides that rules of procedure and evidence “shall not abridge, enlarge or modify any substantive right.” 28 U.S.C. § 2072(b). Some class actions attempt to use the class action device to evade obstacles to obtaining individual relief under the applicable substantive law, or to short circuit the substantive law where it requires individualized proof. The Ninth Circuit recently focused on the Rules Enabling Act in reversing (in large part) a class certification order.

In Wit v. United Behavioral Health, — F.4th –, 2023 WL 411441 (9th Cir. Jan. 26, 2023), the plaintiffs brought claims under the Employee Retirement Income Security Act (ERISA), asserting that the defendant utilized internal guidelines for reviewing claims  for behavioral health services under health benefit plans that were allegedly more restrictive than the terms of the plans. The plaintiffs attempted to avoid individualized issues by seeking as their remedy an order requiring the defendant to “reprocess” claims of putative class members, without the court deciding whether there was an actual entitlement to benefits. The district court certified a class on this theory. It reasoned that to order “reprocessing” it would not have to make determinations about entitlement to benefits (which would implicate “a multitude of individualized circumstances” regarding each class member’s medical condition). After a bench trial, the district court issued declaratory and injunctive relief in favor of the class, including ordering the defendant to utilize new guidelines, ordering “reprocessing” of claims in accordance with the new guidelines, and appointing a special master to oversee compliance for ten years. Some might characterize that as a court effectively overseeing the operations of an insurer.

The Ninth Circuit reversed the class certification order to the extent it was based on the “reprocessing” remedy (but not with respect to a breach of fiduciary duty claim). The Ninth Circuit reasoned that, under ERISA, “reprocessing is not truly the remedy that Plaintiffs seek, it is the means to the remedy that they seek,” i.e., entitlement to benefits. The district court thus “improperly allowed Plaintiffs to use Rule 23 as a vehicle for enlarging or modifying their substantive rights where ERISA does not provide reprocessing as a standalone remedy.”

The Ninth Circuit also held that the district court erred in excusing absent class members from complying with the requirements under their benefit plans that they exhaust administrative remedies, including pursuing an administrative appeal. This was likewise inconsistent with the Rules Enabling Act because “the district court abridged [defendant’s] affirmative defense of failure to exhaust and expanded many absent class members’ right to seek judicial remedies under Rule 23(b)(3).” It noted that the Supreme Court has held that a class cannot be certified by effectively depriving the defendant of its individualized defenses.

I see potential implications here beyond ERISA plans, to putative class actions involving other contractual and statutory rights. Defendants often can argue that the terms of the contract or other applicable substantive law require an individualized analysis, or that the putative class members must take individualized steps to establish their rights. Under this decision, a court cannot ignore those obstacles to class certification.

One of the first significant class certification-related decisions of 2023 comes from the Fifth Circuit. While some trial courts hesitate to strike class action allegations on the pleadings, the district court here concluded very early in the case that it was clearly inappropriate for class certification. The Fifth Circuit agreed, in a published opinion that will be helpful to defendants in that circuit and elsewhere.

Elson v. Black, — F.4th –, 2023 WL 111317 (5th Cir. Jan. 5, 2023) was much like many putative class actions brought against product manufacturers challenging representations about their products. The plaintiffs alleged that the manufacturer of a massage device, described in the opinion as “a two-foot stick with hard prongs,” misrepresented its potential health benefits. The defendant allegedly represented that the device could “‘virtually eliminate cellulite,’ help with weight loss, and relieve pain.” Most prospective purchasers would probably take such statements with a grain of salt (or many). But the plaintiffs here claimed they were duped. They sued under the Magnuson-Moss Warranty Act, various state statutes and for unjust enrichment. They sought a nationwide class and alternatively seven statewide subclasses.

The district court struck the class allegations in a single paragraph, focusing on reliance being an individualized issue and concluding that commonality was not satisfied. But the Fifth Circuit wrote considerably more. It focused on predominance, finding that common issues of law and fact did not predominate for two reasons. First, there were differences in state law. Even at the pleadings stage, the plaintiff was required to provide the district court with “an extensive analysis of state law variations,” and failed to do so. Their appellate brief demonstrated substantial variation in state law on reliance.

Second, it was clear that the plaintiffs and the putative class members relied on different misrepresentations about different potential health benefits of the product. “[T]he possibility of class analysis disintegrates because the members did not rely on the same alleged misrepresentations.” Plaintiffs’ proposal of subclasses did not solve this problem because “‘subclass’ is not a magic word that remedies defects of predominance”; “[t]he burden is on Plaintiffs to demonstrate to the district court how certain proposed subclasses would alleviate existing obstacles to certification,” which they failed to do.

Not every putative class action is appropriate for this type of challenge on the pleadings. There are strategic reasons why defendants often do not file a motion to strike. But the lesson here is that, at least in some circuits, plaintiffs’ class allegations will not survive this type of motion, particularly if they allege a nationwide or multistate class involving significant differences in state law, or multiple alleged misrepresentations.

When negotiating a class action settlement, lawyers on both sides may need to consider whether subgroups within the class need to be separately represented by different counsel. The First Circuit recently reached that conclusion in Murray v. Grocery Delivery E-Services USA Inc., 2022 WL 17729630 (1st Cir. Dec. 16, 2022).

Murray involved three different types of claims under the Telephone Consumer Protection Act that, at first blush, seem similar. They alleged: (1) improper phone calls to class members using an auto-dialer; (2) calling people who were on the national do-not-call registry; or (3) calling people who were on the defendant’s internal do-not-call list. The settlement proposed that all class members would receive equal payments, regardless of which category they fell in. Examining the claims in detail, the First Circuit found that the three different categories of claims involved different elements of proof and different defenses. The auto-dialer claim became relatively worthless following a recent Supreme Court decision issued after the negotiations. The First Circuit concluded that it was procedurally unfair for settlement negotiations to be conducted by one set of plaintiffs’ counsel representing the entire class, rather than having each subgroup separately represented. While “[a]rms-length negotiations might assess the differences in claim value as too insignificant to warrant the delay, expenses, and risk of foregoing a global settlement,” the First Circuit concluded that a district court should not evaluate a proposed settlement until such “arms-length” negotiations with separate counsel had occurred.

The First Circuit also agreed with the consensus of most other circuits that have approved named plaintiff incentive awards. It rejected an Eleventh Circuit decision (see my blog post) holding that two 19th century Supreme Court decisions (prior to the advent of modern class actions) prohibited such awards. The First Circuit reasoned that such awards must be fair and reasonable, that named plaintiffs must “bear the brunt of litigation,” and that “incentive payments remove an impediment to bringing meritorious class actions and fit snugly into the requirement of Rule 23(e)(2)(D) that the settlement ‘treats class members equitably relative to each other.’”

A recent Ninth Circuit decision on a class action settlement, In re Apple Inc. Device Performance Litigation, 2022 WL 4492078 (9th Cir. Sept. 28, 2022), received significant attention in the legal media. It addressed several issues of significance to lawyers negotiating class settlements: (1) class representative incentive awards; (2) a requirement that class members attest to having experienced the harm at issue to obtain relief; (3) notice to class members that are legal entities; and (4) the legal standard for settlements negotiated prior to class certification. Here are my thoughts on the court’s treatment of each of these issues:

Incentive Awards: The Ninth Circuit approved incentive awards of $1,500 for named plaintiffs who were not deposed and $3,000 for those who were. It noted that it had previously rejected or criticized awards of $20,000 and $30,000. The Ninth Circuit reiterated its prior position that an incentive award should be consistent with the time and effort spent by the plaintiff, the benefit to the class and any risks taken by the plaintiff. But the award should not put the plaintiff in a “preferred position in the settlement.” The Ninth Circuit rejected the Eleventh Circuit’s view that two 19th century Supreme Court cases prohibit these awards (see my blog post on that), an issue that might reach the Supreme Court. While defendants often view these awards as immaterial from a financial perspective, ensuring smooth sailing of a settlement may warrant researching how they’ve been treated in the circuit before agreeing to a specific amount.

Attestation Requirement: The plaintiffs brought statutory and other claims based on allegations that Apple’s updated version of iPhone software slowed the phones’ performance without disclosing this at the time it released the updates. The settlement class was defined as all owners of certain iPhones at the relevant time, but cash payments were made available only to class members who attested under penalty of perjury that they experienced the diminished performance during the relevant timeframe. The Ninth Circuit found this appropriate because a class member who could not attest to this would have a “valueless claim.” The Ninth Circuit rejected an argument that class members who did not experience (or notice) the problem lacked standing because it concluded that allegations that all putative class members experienced the problem were sufficient where the case settled at the pleading stage.

Notice to Non-Individual Class Members: Some class members were businesses that bought iPhones for their employees. Apple told the district court it did not have contact information for corporate purchasers, so notice was given to all individuals who had registered iPhones through Apple, including individual employees of businesses. The Ninth Circuit found this sufficient.

Legal Standard for Settlements: The Ninth Circuit vacated and remanded the district court’s approval of the settlement because the district court’s order, while thorough, stated that it had presumed that the settlement was fair and reasonable. This was contrary to Ninth Circuit precedent that such a presumption must not be applied for settlements reached prior to class certification. There isn’t much that practitioners can do to avoid this except make sure that any proposed order submitted to the trial court recites the latest legal standards in the circuit. Perhaps you could request correction of an order after it is issued if it does not recite the correct standard and an objector is likely to appeal.

Last week the Eleventh Circuit addressed an issue that many class action practitioners probably haven’t thought much about: whether approval of a class action settlement requires that each class member obtaining relief have Article III standing to sue. Defendants typically want a broad class definition because they are focused on finality and buying peace. Plaintiffs are more concerned about the relief class members are getting than whether everyone falling within the class definition would have standing. But the Eleventh Circuit vacated and remanded a settlement because a relatively small part of the class as defined would not have standing.

In Drazen v. Pinto, No. 21-10199, — F.4th –, 2022 WL 2963470 (11th Cir. July 27, 2022), the Eleventh Circuit heard an appeal by an objector from a final approval of a class action settlement in a case under the Telephone Consumer Protection Act (TCPA). The issue raised by the objector was whether the settlement qualified as a “coupon settlement” under the Class Action Fairness Act and therefore required that the request for attorneys’ fees be analyzed differently. But the Eleventh Circuit never reached that issue, instead raising on its own and deciding a separate question: whether all class members had Article III standing.

The issue arose because a prior Eleventh Circuit decision had held that receiving a single unwanted text message is not a sufficiently concrete injury to establish standing under Supreme Court precedent. Approximately 7% of the class fell in that category, along with potentially those class members who received only a single unwanted telephone call. (Members of Congress who enacted the TPCA in 1991, in the days of landlines, wasted fax paper and unwanted interruptions during family dinnertime, surely did not expect that three decades later millions of dollars of attorneys’ fees and hundreds of hours of judicial time would be spent on resolving just how many unwanted texts or cell phone calls labeled “potential spam” are necessary for standing to sue). Under the Supreme Court’s decision in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021), “[e]very class member must have Article III standing in order to recover individual damages.” But some lower courts have concluded that this does not need to be determined at the pleadings stage and can potentially be addressed at class certification, or perhaps even later than that but it must happen before damages are recovered. Applying this principle to a class action settlement, the Eleventh Circuit held that “when a class seeks certification for the sole purpose of a damages settlement under Rule 23(e), the class definition must be limited to those individuals who have Article III standing.” This is because “[o]therwise, individuals without standing would be receiving what is effectively damages, in violation of TransUnion.” So those who were hoping for potentially $35 (depending on how many class members make claims) as compensation for an unwanted text message will be out of luck. The case returns to the district court for redefinition of the class, including resolution of the nettlesome question of “whether a single cellphone call is sufficient to meet the concrete injury requirement,” an issue on which the Eleventh Circuit had not yet opined, and so it left that to the district court to resolve.

So what is the lesson for lawyers settling class actions in federal court? Don’t forget to think about whether everyone in the class will have standing, along with everything else.

The Ninth Circuit recently addressed an issue that tends to arise frequently in class certification motion practice: how trial courts should apply the predominance requirement where appellate decisions have said that the need to calculate individualized damages generally is not sufficient on its own to defeat class certification, but some putative class members likely have no damages. On these types of issues, plaintiffs often try to characterize defendants’ arguments in opposition to class certification as raising mere “damages issues” that can be addressed individually at the end of a class case, and defendants often respond that the issues they raise go to liability, not merely damages, and in any event the damages trials would be too complicated and impractical. The Ninth Circuit recently clarified that if determining liability requires highly individualized inquiries, a class should not be certified, and any individualized damages trials would have to be feasible.

In Bowerman v. Field Asset Services, Inc., Nos. 18-16303, 18-17275, — F.4th –, 2022 WL 2433971 (9th Cir. July 5, 2022), the plaintiffs contracted with the defendant to perform preservation services on properties being foreclosed on. They claimed that they should have been classified as employees rather than independent contractors under California law, and therefore should have been paid overtime and reimbursed for business expenses. The district court certified a class, decided certain issues on partial summary judgment in favor of the class, and left for a later damages trial whether a class member worked overtime (and to what extent) and whether the class member was entitled to reimbursement for business expenses (and the amount thereof).

The Ninth Circuit reversed the class certification order. It explained that “We need not decide whether common evidence can prove that [defendant] has a uniform policy of misclassifying its vendors” because “[defendant’s] liability to any class member for failing to pay them overtime wages or to reimburse their business expenses would require highly individualized inquiries on whether that particular class member ever worked overtime or ever incurred any ‘necessary’ business expenses.” (Emphasis in original.) The plaintiffs had “mischaracterize[d] an issue of individualized liability as an issue of individualized damages.” (Emphasis in original.) The Ninth Circuit explained that if the question involves the existence of damages, that is a liability issue, not a damages issue.

The Ninth Circuit also concluded that, under its interpretation of the Supreme Court’s decision in Comcast Corp. v. Behrend, 569 U.S. 27 (2013), the plaintiffs had failed to demonstrate that damages were “capable of measurement on a classwide basis” because they could not “show that the whole class suffered damages traceable to their alleged misclassification as independent contractors,” even if the amounts of those damages would need to be proven individually. In addition, determining damages would require “excessive difficulty” because there was little documentary evidence, and “using the individual testimony of self-interested class members to calculate the overtime hours they worked and the business expenses they incurred isn’t easy.” In a bellwether trial conducted by the district court, eight trial days had been required to determine damages for a sample of only eleven class members.

This decision helpfully clarifies the perennial debate between what constitutes a “damages” issue versus a “liability” issue. As I’ve often written on this blog, it can be helpful to think about the class certification analysis by analyzing how the named plaintiffs’ or putative class members’ claims would be tried in an ordinary individual case, and what evidence the defendant would be entitled to introduce. Here, the bellwether trial helped the Ninth Circuit determine that this case could not be litigated on a class basis.

I used to say that denials of class certification on numerosity grounds were rare and that usually it was futile to oppose class certification on that ground. That’s becoming less true as some circuits, including the Third Circuit, have adopted a stricter approach to how plaintiffs must establish numerosity. If Plaintiffs are using an estimate of the number of class members, the estimate may have to be closely tailored to the precise parameters of the proposed class to pass muster. Following these recent decisions, defendants should carefully evaluate whether to contest numerosity.

Allen v. Ollie’s Bargain Outlet, Inc., No. 21-2121, — F.4th –, 2022 WL 2284654 (3d Cir. June 24, 2022) is a putative nationwide class action under the Americans with Disabilities Act (ADA), alleging that Ollie’s, an operator of retail stores, had a practice of placing merchandise and other items in aisles, obstructing access for wheelchair users. The district court certified a class, but the Third Circuit, after accepting an interlocutory appeal, vacated the class certification order on numerosity and commonality grounds.

Plaintiffs attempted to establish numerosity in three ways: (1) using a national survey of persons with mobility disabilities, along with census data to estimate regional numbers; (2) having someone record on video 16 customers using wheelchairs during a seven-day period at two of the defendant’s stores where the plaintiffs shopped; and (3) submitting written complaints received by the defendant from 12 customers. The Third Circuit found all of these approaches insufficient.

As to the survey and census data, the court found it speculative to extrapolate data from a nationwide survey to the plaintiffs’ region, and “[e]ven if that extrapolation is accurate … we would still be left with no basis to determine what portion of those one hundred wheelchair-bound residents of Monaca are customers of Ollie’s, let alone what portion have suffered a common ADA injury.” As to the video recording, while the Third Circuit found that more probative, it was still insufficient. The court emphasized that some people who use wheelchairs are not “disabled” under the ADA. And the video recordings did not establish that the wheelchair users encountered an ADA violation, i.e., the alleged obstructions in aisles.  The customer complaints were also insufficient because, assuming they were admissible, one of them was actually a compliment about how accessible one of the stores was for a wheelchair user, and the remaining eleven were too few to demonstrate numerosity.

The Third Circuit also found that commonality was lacking, finding the case analogous to Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011). The court reasoned that the only evidence of inaccessible aisles was limited to Pennsylvania, and there was no evidence to support a nationwide practice that could justify certifying a nationwide class. The Third Circuit also concluded that the evidence did not support commonality with respect to a proposed class broadly encompassing all kinds of “access barriers.”  However, the Third Circuit left open the possibility that the district court could certify a narrower class on remand.

The majority did not address an evidentiary issue regarding whether the Federal Rules of Evidence apply to class certification decisions, and thus whether the customer complaints were admissible. Judge Porter, however, wrote a thorough concurring opinion highlighting a circuit split on that issue and concluding that under Federal Rule of Evidence 1101 (probably not one you’ve read recently, and which several circuits apparently had overlooked), the rules of evidence apply in full to class certification proceedings (except that Federal Rule of Civil Procedure 43(c) allows courts deciding motions to accept affidavits or declarations in lieu of live testimony). Judge Porter’s concurring opinion is well worth reading and citing if you are faced with attempts to use hearsay or other inadmissible evidence to certify a class.

A recent Sixth Circuit case addressed an issue that tends to arise frequently in various types of class actions, such as property insurance and environmental cases: whether property valuation issues are appropriate for class treatment. The answer here was “no,” and the opinion could be useful to defendants in other contexts.

Tarrify Properties, Inc. v. Cuyahoga County, — F.4th –, 2022 WL 2128816 (6th Cir. June 14, 2022) involved a constitutional challenge to a tax foreclosure procedure in Ohio that allowed a county to place foreclosed properties into a “land bank” without allowing the property owner to receive any excess equity. The plaintiff filed a putative class action challenging this foreclosure procedure under takings clauses in the federal and state constitutions. The district court denied class certification, and the Sixth Circuit affirmed.

The proposed class was defined as owners of relevant tax-foreclosed properties who had excess equity at the time of the foreclosure. That was likely the only viable way to define the proposed class because if there was no excess equity, the property owner would have no claim. But this posed what the Sixth Circuit concluded was an insurmountable problem for ascertainability (identifying the class members) and predominance. Class members could not be identified without determining the fair market value of their property at the relevant time, and experts on both sides agreed that this would depend on many factors. And if the defendants’ expert was correct, the named plaintiff had no excess equity, presenting an adequacy of representation problem as well.

The plaintiff argued that this problem could be overcome by relying on the properties’ assessment values, or on the basis that the county was bound by the value it had used for foreclosure purposes under collateral estoppel or judicial estoppel. The Sixth Circuit rejected these arguments, explaining that, although the assessment values were a “default valuation,” they were not “unrebuttable” or a “conclusive answer.” The assessments were up to six years old, and in any event could be challenged in the litigation. As to estoppel, the county board had not made findings on the fair market value of properties in its foreclosure order.

The plaintiff also suggested that the valuation issues could be resolved by a special master, subclasses or through a new “mass appraisal” for litigation purposes. The Sixth Circuit rejected those options as well because they would still require “mini-trials over each property’s value.”

This decision seems helpful to defendants faced with class actions in other contexts where the claims involve property values, such as property insurance cases, and cases alleging that an environmental nuisance such as an odor or dust from a facility has impacted property values in the area.