Georgia Diminished Value Putative Class Action: Motion to Dismiss Decision

In prior blog posts, I’ve covered developments in the putative class actions against insurance companies in Georgia involving diminution in value on property insurance claims (see my March 11, 2016 post, for example). These cases stem from a 2012 Georgia Supreme Court decision ruling that diminution in value following completion of repairs was potentially covered under a property insurance policy (see my June 6, 2012 blog post). A Georgia federal court recently decided a motion to dismiss in one of these class actions.

In Morrow v. Allstate Indem. Co., 2017 U.S. Dist. LEXIS 46245 (M.D. Ga. Mar. 29, 2017), the court ruled as follows on the central issues:

  • The court denied the motion to dismiss the breach of contract claim, rejecting an argument that the policy did not cover diminished value because it covered only “sudden and accidental direct physical loss,” and rejecting an argument based on the policy’s replacement cost coverage provision. On the second point, the court noted that the policy provided actual cash value coverage unless and until the repairs were completed. The court wrote that “[a]ctual cash value’ implies the obligation to compensate for any diminished-value losses sustained by the insured,” and that “because the Building Reimbursement Payment is a payment in addition to the actual cash value payment, any limitations in the Building Structure Reimbursement provision are irrelevant.” at *12. The court further concluded that, for pleading purposes, it was sufficient for the plaintiffs to allege “that their home suffered foundational and/or structural support damage, water damage, and mold damage,” and that “despite these repairs, the fair market value of their home diminished because of the damage.” Id. at *15.
  • The court denied the motion to dismiss the claim for injunctive relief or specific performance, stating that “[t]he Court cannot say at this point that Plaintiffs have an adequate remedy at law in the form of a damages award.” at *20.
  • The court granted the motion to dismiss the declaratory judgment claim. Plaintiffs argued that they had a likelihood of future injury, asserting that they have a 10% chance of submitting a covered claim for property damage in any given year. The court concluded that this was insufficient to allege a reasonable expectation of a future injury, and thus dismissed the declaratory judgment claim. at *23-24.

It may be advisable for insurers to continue to monitor these cases. I’m not aware of any cases in which plaintiffs have sought to litigate the issue outside of Georgia. The diminished value issue has the potential to spread beyond Georgia, as occurred in the auto insurance context.

DRI Class Action Seminar 2017

The Defense Research Institute (DRI) is once again hosting what is sure to be a superb and well-attended class action seminar this year, on July 20-21, 2017, in Washington D.C. The program will include, among other sessions:

  • a presentation by Alison Frankel of Thomson Reuters on the impact of the Trump Administration and Justice Gorsuch on class actions;
  • presentations on the anticipated Supreme Court decisions on class action waivers in employment agreements and appellate review of denials of certification;
  • insights from Justice Suzanne Cote of the Supreme Court of Canada on class actions north of the border;
  • insights on the Rule 23 amendment process from Judge Robert M. Dow, Jr., a member of the advisory committee;
  • a program on the hot topic of data privacy class actions;
  • a session on liability insurance coverage issues raised by class claims;
  • sessions on ascertainability, American Pipe tolling, and class action settlements.

I’ve attended this program every year since its inception, and I am really looking forward to this year’s installment. (In the interests of full disclosure, I will be the vice chair for this year’s seminar.) Register soon for a lower registration fee and to ensure that you receive the hotel discount. Free registration is available for in-house counsel and claims executives whose companies are members of DRI, or who are sponsored by a DRI member.

Thoughts on the Fairness in Class Action Litigation Act of 2017

A fair amount of attention has been given in the legal media to the Fairness in Class Action Litigation Act of 2017, H.R. 985, which has passed the House of Representatives and is currently under consideration by the Senate. Corporate groups and the defense bar have sung its praises, and the plaintiffs’ bar has railed against it. Less attention has been given to areas where, if this bill becomes law, courts will need to decide what it means. Here are a few thoughts on that:

  1. Type and Scope of Injury Requirement: The bill provides that a class action for monetary relief may not be certified unless the plaintiff “affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” A court is required to conduct a “rigorous analysis” of this question. Expect extensive disputes over what constitutes the “same type and scope of injury.” This does not appear to mean that every class member has the same amount of damages. What constitutes “type” and “scope” would be left to the courts to figure out.
  2. Class Representative Conflicts of Interest: The bill requires disclosure in a class action complaint regarding whether any named plaintiff is a relative or present or former employee of class counsel, or present or former client of class counsel with respect to a different matter, or has any other contractual relationship with class counsel. It further requires that “the complaint shall describe the circumstances under which each class representative or named plaintiff agreed to be included in the complaint . . . .” Courts would have to determine what level of detail is required here, and the extent to which, if any, the attorney-client privilege applies. Courts would also need to determine what type of motion could be used to attack a complaint that the defendant claims insufficiently complies with these requirements, perhaps a Rule 12(b)(6) motion to dismiss.
  3. Ascertainability: The bill further provides that a class cannot be certified unless the class is “defined with reference to objective criteria and the party seeking to maintain such a class action affirmatively demonstrates that there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within the class definition and (b) for distributing directly to a substantial majority of class members any monetary relief secured for the class.” I expect courts would continue to debate, as many of them currently are, what constitutes a “reliable and administratively feasible mechanism.” Could this include self-identification by affidavit, or not? Would compliance with this requirement depend on how many people come forward?
  4. Attorneys’ Fees: The bill would require that attorneys’ fees in cases involving monetary awards be limited to a “reasonable percentage” of funds actually received by class members, and that attorneys’ fees could not exceed the amounts actually received by class members. In cases involving equitable relief, attorneys’ fees would be limited to a “reasonable percentage of the value of the equitable relief, including any injunctive relief.” The litigation here seems likely to focus on what constitutes a “reasonable percentage,” and how you value the equitable relief. There is some existing precedent on these issues, and the extent to which Congress intends to either adopt or modify that precedent could be an issue.
  5. Issues Classes: The bill provides that a court may not certify an issues class under Rule 23(c)(4) unless the court determines, after a “rigorous analysis,” that “the entirety of the cause of action from which the particular issues arise satisfies all the class certification prerequisites of Rule 23(a) and Rule 23(b)(1), Rule 23(b)(2), or Rule 23(b)(3).” I don’t see a lot of room for debate here, although the application of the other requirements of Rule 23, of course, remain hotly debated by the courts.
  6. Stays of Discovery: The bill mandates a stay of discovery pending a motion to dismiss, motion to transfer, motion to strike the class allegations or other motion to dispose of the class allegations, unless particularized discovery is necessary to preserve evidence or prevent undue prejudice. Would this mean that a defendant would be entitled to multiple stays of discovery if it files, seriatim, a motion to dismiss and then, if that is denied, a motion to strike the class allegations or to deny certification?
  7. Appeals: The bill makes appeals of class certification orders mandatory, providing that “[a] court of appeals shall permit an appeal from an order granting or denying class-action certification under Rule 23 of the Federal Rules of Civil Procedure.” Would this mean that a court of appeals is required to hear multiple interlocutory appeals in a case that involves more than one certification order, or a partial decertification of the class? Would an order granting or denying a motion to strike class allegations be appealable?
  8. Rulemaking Authority Provision: The bill provides that “Nothing in this title shall restrict in any way the authority of the Judicial Conference and the Supreme Court to propose and prescribe general rules of practice and procedure under chapter 131 of title 28, United States Code.” Would this mean that the Judicial Conference and the Supreme Court, by virtue of their rulemaking power, could directly override any part of this bill (if enacted), at any time?
  9. Retroactivity: The bill provides that “[t]he amendments made by the title shall apply to any civil action pending on the date of enactment of this title or commenced thereafter.” Would this mean that, if a case is pending where the court has certified a class already, it must revisit certification following the enactment of this law? Would a court have to reevaluate a class settlement or attorneys’ fees that had been approved? Would a court of appeals have to accept an appeal it had previously rejected under Rule 23(f)? There seem to be lots of questions here that courts would need to decide.

Depreciation of Labor Costs Class Action: Nebraska Supreme Court Rules In Favor of Insurer

I’ve regularly followed on my blog key developments in the numerous class actions against the insurance industry involving the application of depreciation to the labor cost component of estimated replacement cost value in determining actual cash value under homeowners and commercial property insurance policies. The Nebraska Supreme Court recently addressed this issue on a certified question from that state’s federal district court. It ruled in favor of the insurer, holding that an insurer may apply depreciation to the cost of labor when determining actual cash value under a standard policy that did not define the term “actual cash value.”

In Henn v. American Family Mutual Insurance Company, No. S-16-597, 295 Neb. 859 (Neb. Feb. 17, 2017), the court concluded that a definition of “actual cash value” was not necessary and that term was unambiguous where Nebraska law had long defined that term as “the value of the property in its depreciated condition.” The Nebraska courts had also recognized several approaches to estimating actual cash value, including a fair market value approach and a broad evidence rule approach, under which a finder of fact may consider all relevant facts and circumstances.  Agreeing with the Oklahoma Supreme Court, the court held that “an insured is properly indemnified when the amount calculated for actual cash value equals the depreciated value of the property just prior to the loss, which includes both materials and labor.” The court further explained that “payment of the full amount of labor” in an actual cash value payment, as the plaintiffs sought, “would amount to a prepayment of benefits to which the insured is not yet entitled.”

This decision is likely to be helpful to the insurance industry in defending the numerous putative class actions pending involving this issue.

Gorsuch on Class Actions: How Might He Compare to Scalia?

Justice Scalia made major contributions to class action law,  writing the Supreme Court’s opinions in Wal-Mart Stores, Inc. v. Dukes and Comcast Corp. v. Behrend, two of the Court’s most significant class action decisions in this decade.  Following President Trump’s nomination of Tenth Circuit Judge Neil M. Gorsuch to replace Justice Scalia, although it may be years before the most junior justice has an opportunity to author a major class action-related opinion, one might ask what type of contribution Judge Gorsuch might make to class action law if he is confirmed.

I found three relevant opinions authored by Judge Gorsuch, one involving class certification, and two involving the Class Action Fairness Act (CAFA). While I would not hazard to attempt to predict how Judge Gorsuch might decide the more far-reaching class certification issues that may come before the Supreme Court, his class action-related opinions seem to demonstrate a high degree of thoroughness and some judicial restraint. It appears that he endeavors to address head on, and persuasively, all of the significant arguments made by the losing party, and to research his opinions quite thoroughly (including citations to a large number of law review articles). That is, I think, what most lawyers and their clients hope for in a judge hearing their case.

Here is a summary of Judge Gorsuch’s class certification and CAFA opinions:

  • Shook v. Bd. of County Comm’rs, 543 F.3d 597 (10th Cir. 2008): In this opinion affirming a denial of class certification, Judge Gorsuch adhered closely to the abuse of discretion standard, explaining that “[w]hile we very well may have made a different decision had the issue been presented to us as an initial matter, and while other district courts perhaps could have chosen, or could choose, to certify similar classes, we cannot say the district court’s assessment was beyond the pale.” at 603-04. The opinion addresses Rule 23(b)(2) in detail, explaining how any classwide injunctive relief must satisfy the specificity requirements of Rule 65(d), and that “if redressing the class members’ injuries requires time-consuming inquiry into individual circumstances or characteristics of class members or groups of class members,” certification may be inappropriate. He explains how manageability is relevant under Rule 23(b)(2), and how “individual issues cannot be avoided simply by formulating an injunction at a stratospheric level of abstraction” that lacks sufficient specificity. Id. at 604. The plaintiffs, prisoners, sought to enjoin prison officials from certain acts, but the proposed injunctive relief either would require judgments to be made about individual factual circumstances, or was too vague to satisfy Rule 65. The opinion noted that subclasses might have been used to avoid some of the problems, but that district courts have no obligation to propose subclasses sua sponte. On another issue addressed in the opinion, Judge Gorsuch correctly anticipated the Supreme Court’s later approach to the question of the extent to which the merits may be addressed on class certification. The opinion cites several law review articles, more than I typically see in a federal court of appeals opinion.
  • BP America, Inc. v. Okla. ex rel. Edmondson, 613 F.3d 1029 (10th Cir. 2010): In this relatively short opinion, Judge Gorsuch identified criteria that the Tenth Circuit would consider in deciding whether to grant discretionary review of a remand order under CAFA. The opinion rejects an argument by the Oklahoma attorney general that the fact that the federal district court clerk had sent the remand order to the state court purportedly deprived the court of appeals of the opportunity to consider whether to grant review under CAFA. Judge Gorsuch finds that argument contrary to the plain language and intent of CAFA. His opinion then proceeds to adopt the First Circuit’s broad list of factors for the Tenth Circuit to consider in deciding whether to grant discretionary review under CAFA, although noting they are not necessarily exhaustive. The opinion discusses in detail the application of those factors in the decision to grant leave to appeal.
  • Hammond v., Inc., 844 F.3d 909 (10th Cir. 2016): This case involved the amount in controversy under CAFA. The plaintiff claimed that failed to disclose that it would charge her a monthly fee even if she did not use the service. She sued on behalf of a putative class of customers who cancelled subscriptions based on the allegedly inadequate disclosure. demonstrated that if all of the putative class members obtained the damages sought by the named plaintiff, or even a fraction of that, the $5 million threshold under CAFA would be easily met. The district court, however, concluded that the defendant had not met its burden of proof because it had failed to isolate the claims of those who “felt duped” by inadequate disclosures. In reversing the district court, Judge Gorsuch explained how the term “in controversy” has long meant the amount that a factfinder might legally award, and such a “legal possibility” is sufficient for jurisdictional purposes. Judge Gorsuch further explained that the district court might well have been correct that the amount calculated by the defendant was unlikely to be awarded, but “the question at this stage in the proceedings isn’t what damages the plaintiff will likely prove but what a factfinder might conceivably lawfully award.” He further noted that this rule “serves a useful purpose, helping to keep cases from bogging down in mini-trials before they’ve even begun,” and also avoids forcing a defendant to attempt to prove its own liability in order to get into federal court. Addressing the plaintiff’s argument that the case should stay in state court until the actual stakes of the litigation are further fleshed out, Judge Gorsuch explained that CAFA provides for removal at the outset of a case and an early appeal of a remand order. “Our job,” he wrote, “is to abide Congress’s policy directions, not replace them with others of our own hand.”

Supreme Court to Hear Class Action Cases Involving Class Action Waivers and Tolling of Statutes of Limitations

The U.S. Supreme Court recently granted certiorari in class action cases involving: (1) class action waivers in employment contracts; and (2) whether filing of a securities class action tolled a statute of repose. In both cases the questions presented are relatively narrow, but opinions issued by the Supreme Court potentially could have broader implications for the law on class action waivers and class action tolling.

Epic Sys. Corp. v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA, Inc., Nos. 16-285, 16-300, and 16-307 (SCOTUSblog page) involve whether an agreement to arbitrate employment-related disputes, which requires individual arbitration, and provides for a waiver of class action and collective action claims, is enforceable under the Federal Arbitration Act notwithstanding the provisions of the National Labor Relations Act. This issue is the subject of a circuit split, with the Second, Fifth and Eighth Circuits enforcing such arbitration agreements, and the Seventh and Ninth Circuits (and the NLRB) finding the agreements unenforceable. The issue appears to focus mainly on whether the National Labor Relations Act provides a “contrary congressional command” and thus falls within a savings clause in the Federal Arbitration Act. This case will obviously be important to employers utilizing or considering the use of such arbitration provisions. The case also may impact other areas where plaintiffs argue that an arbitration agreement conflicts with some other federal statutory right.

Caifornia Public Employees Retirement Sys. v. ANZ Secs., Inc., No. 16-373 (SCOTUSblog page) involves whether, under the class action tolling rule of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), the filing of a putative class action satisfies the three-year time limitation (statute of repose) in Section 13 of the Securities Act with respect to the claims of putative class members. This case may address a broader question of whether American Pipe tolling applies to statutes of repose, or only to statutes of limitation. If the Court rules that American Pipe does not apply to statutes of repose, that may provide corporate defendants some protection against what can be lengthy periods of potential uncertain liability where putative class actions can take years to resolve.

Ascertainability Not Required In Ninth Circuit, But Manageability Remains

One of the first significant class action appellate decisions of 2017 was issued this week. In Briseno v. ConAgra Foods, Inc., No. 15-55727 (9th Cir. Jan. 3, 2017), the Ninth Circuit held that Rule 23 does not require that it be “administratively feasible” to identify class members in order for a class to be certified. The opinion is worth reading not only on that important point but also because it discusses a number of key issues that are hotly contested in class certification proceedings. In extensive dicta, the Ninth Circuit suggests approaches to conducting class litigation that defendants will undoubtedly need to challenge strongly in future cases.

The case alleged that Wesson cooking oils are improperly labeled as “100% Natural,” similar to numerous class actions challenging similar labels on food products. Given that consumers do not usually maintain records of what cooking oils they purchased, when they bought them or what was on the label, the defendant challenged whether the proposed class was sufficiently ascertainable or identifiable.

The Ninth Circuit held that there was no such “administratively feasible” requirement, agreeing with the Sixth and Seventh Circuits and disagreeing with the Second and Third Circuits on this point, likely increasing the chances of Supreme Court review. The Ninth Circuit focused on the absence of any “administratively feasible” requirement in the text of Rule 23, although Rule 23 presumes that there is a “class” and the members of the “class” must be identifiable for various purposes, including, for example, notice and the opportunity to opt out (under Rule 23(b)(3)), discovery (if the court permits discovery from the class), and the enforceability of any judgment. The Ninth Circuit recognized that these issues will bear on manageability and other class certification requirements, but concluded they are not a separate, independent requirement.

The court also suggested, in dicta, various approaches that might be taken in some cases to get around these problems if the district court otherwise finds class certification appropriate – such as notifying a difficult-to-identify class by publication and a website, conducting a trial for purposes of determining some type of vague aggregate liability, then asking class members to submit affidavits and claim forms (which the Ninth Circuit suggested might have a 10-15% response rate), and then (unless the defendant at some point agrees to a settlement) conducting what could be many thousands of individual trials on what the court describes as “damages,” but would actually focus on whether there is any liability to the class member.

Here are a few thoughts I had on Briseno, with a focus on how defendants can defend class actions in the Ninth Circuit and other circuits that have rejected an “administratively feasible” type of ascertainability requirement:

  • Other Ways to Challenge Class Definitions: There are lots of ways to challenge the class definition in addition to whether the class is administratively feasible. In many instances, the proposed class is overbroad and includes persons who have no injury and no standing. The proposed class may be so vague that putative class members would not be able to readily determine whether they are part of it, or a court may have difficulty determining at trial, or in a post-trial claim procedure or in enforcing a final judgment, who is in the class. The proposed class also might be an improper fail-safe class, where the only people who are in the class as defined would be automatically entitled to relief.
  • Manageability: The Ninth Circuit concluded that imposing a separate “administrative feasibility” requirement would render the manageability requirement superfluous, and that such concerns should be addressed in the context of manageability, with a cost-benefit type analysis. (Slip op. at 13-14.) To effectively press the case on manageability, defendants may want to focus on any notice plan and trial plan provided in Plaintiffs’ motion for class certification, or the absence of such a plan. Defendants might also demonstrate affirmatively what problems would be presented in giving notice, and provide some detail on how they would intend to try the defense case with individualized evidence.
  • Rules Enabling Act: The Rules Enabling Act is something that I think defendants should be increasingly focusing on. This may be what defendants should really urge the Supreme Court to address, even more than ascertainability. The Ninth Circuit recognized that, under the Rules Enabling Act, the parties must have the same rights in a class proceeding that they have in an individual suit. The Supreme Court made clear last year that it would “violate[s] the Rules Enabling Act [to] giv[e] plaintiffs and defendants different rights in a class proceeding than they could have asserted in an individual action.” Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016). In Briseno, the Ninth Circuit noted that “in litigating class certification, ConAgra took discovery of the class representatives, challenged whether they bought Wesson oil products, attacked their credibility, and disputed whether they relied on the label at issue.” (Slip op. at 20.) Under the Rules Enabling Act and Tyson Foods, a defendant can make a strong argument that it should have the right to do all of these things with respect to each member of the putative class. The Ninth Circuit suggested that ConAgra could do this in individual damages proceedings after liability is established. But these issues are not merely damages issues. They go to whether there is any liability at all to the putative class member — if they did not buy the product, they are not credible or they did not rely on the label. There is no question that the defendant would be entitled to take discovery on and try those issues in an individual case. It seems to contravene the Rules Enabling Act for a court to severely limit those rights simply because it wants to hear the proceeding as a class action. The Ninth Circuit’s suggestion in a footnote that a court can allow “limited discovery from absent class members” (Slip op. at fn. 10) seems clearly insufficient. How can a defendant adequately determine credibility or reliance, for example, without deposing each individual class member?

Ultimately, a defendant faced with the type of class proceeding that the Ninth Circuit suggested in its extensive dicta may need to take the position that it will try thousands (or tens or hundreds of thousands, or more) of individual claims in the “damages” proceedings, will insist on a jury trial for each one (under the Seventh Amendment), and will seek to take pre-trial discovery in each and every one of those (and for a court to distribute any money cy pres to people who do not come forward would be contrary to due process). If that type of proceeding is what Rule 23 actually provides for, as the Ninth Circuit’s dictum seems to suggest, then a district court would have to figure out how it can actually conduct that many trials.

What Will The Courtrooms Of The 2020s Look Like?

I recently attended a presentation by futurist Michael Rogers that sparked me to think about what the courtrooms of the 2020s might look like. According to Rogers, one of the next big advances in technology will be augmented reality devices, such as smart glasses. Google previewed that with its “Google glass” product, which was unsuccessful but probably because it was before its time. The technology will be able to provide you with a screen within your field of vision that will display content visible to you if you are wearing the glasses, but not others.

This may take litigation practice to the next level. Earlier this week I argued a case in the First Circuit. In preparing for such an argument, we all try to read many cases and pack as much information as possible into our memory. Five or ten years from now, more or less, a lawyer arguing a case might well be able to use this technology to aid his or her memory, so that if a judge asks during the argument about a particular case, your notes about that case, the key section of that case, and/or a thought about that case conveyed by your co-counsel may appear on screen in your field of vision, assisting with your real time response and augmenting your own memory. To be most effective, the computerized system would need to itself understand the question being asked and instantly display the relevant information. The same type of information would be displayed automatically if a question were asked about a particular aspect of the appellate record. A tech-savvy judge might have the same type of information automatically appear on a screen in front of him or her, perhaps along with another question suggested by his or her law clerk or a thought conveyed by another judge on the panel. In essence, human memories will be supplemented and collaboration enabled, in real time, by technology, perhaps taking the practice of law and judging to the next level. We still may not all have the “total recall” that Chief Justice Roberts had in his days as an advocate, and there still will be plenty of human expertise and skill involved in deciding how to use the information made available in one’s field of vision, but technology may make lawyers better advocates and judges better at judging as well. And some of us may be getting to the courthouse in our autonomous vehicles (flying like the Jetsons may take another decade or two beyond that). That is unless video conferencing becomes so close to being physically present that travel to the courthouse becomes a thing of the past.

Defending Class Actions in 2016

I thought readers might find helpful some broader observations on strategies for defending class actions in 2016:

  • Dig in Deep Early: Some defense counsel are accustomed to the practice of filing a motion to dismiss in virtually every putative class action. Some in-house counsel, eager to save costs, have pushed defense firms to agree to prepare these motions for reduced flat fees, in the hopes of ending the case early and at a reduced cost. But if you lose that initial motion, which may not be researched as thoroughly because of a reduced flat fee, while you may still have plenty of additional arguments to make on class certification and on the merits, the plaintiffs will have more momentum and the judge may view the case as potentially more meritorious. I think the better approach is to spend the time and money digging deep into the legal issues to try to predict more accurately how the issues presented by a motion to dismiss ultimately might come out at the appellate level, and doing sufficient internal homework with the business units involved to evaluate the strengths and weaknesses on class certification. That comes at a greater cost than a “knee jerk” motion to dismiss, but it is money well spent because it puts everyone in a better position to make a more informed decision about whether a motion to dismiss or some other strategy (such as a motion to strike class allegations, or taking early depositions of named plaintiffs, or waiting to defend against class certification) is the better way to go.
  • Focus Intently on Each of the Elements of the Causes of Action and the Defenses: Federal district courts are increasingly taking a claim-by-claim, element-by-element approach to evaluating class certification. You will be well-served by having a memo written early in the case laying out each element of each claim and defense, what has to be proven, and assessing whether the evidence is likely to be common to the class or individualized. On the defense side there often are some elements of some claims that you may have to concede are likely to be the subject of common evidence. You need to identify early where to focus your efforts in discovery and briefing. This should not be an afterthought, after discovery has been taken and you are preparing your opposition to certification.
  • Think Deeply About How the Named Plaintiffs’ and Putative Class Members’ Cases Would Be Tried: When it comes time for the court to decide whether to certify a class, one of the best ways to defeat class certification is by demonstrating specifically what evidence you would want to put on if the named plaintiffs’ cases were tried that would be unique to those plaintiffs and could affect the outcome. Put yourself in the shoes of preparing to try one of those small individual cases and think hard about how you would do it. You can then build that up by making a similar showing with respect to putative class members, and where possible demonstrate that a substantial percentage of putative class members’ claims likely will require this type of individualized evidence that the defendant has a right to put on. One of the most significant nuggets of guidance we’ve received from the Supreme Court recently is that under the Rules Enabling Act, a court must not “giv[e] plaintiffs and defendants different rights in a class proceeding than they could have asserted in an individual action.” Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016). If you have the right to put on individualized evidence in trying the named plaintiffs’ individual cases, you must have the same right if the case were tried as a class action. Demonstrating how you would try the named plaintiffs’ (and/or putative class members’) individual cases can be powerful in defending against class certification.


Labor Depreciation Class Action Update: Decisions on Class Certification

I have had a busy summer and am overdue in updating readers on recent decisions in class actions against insurers involving the “labor depreciation” issue. The issue involves whether, when insurers estimate the “actual cash value” of damage to real property under a property insurance policy, depreciation is properly applied to the full estimated replacement cost (as insurers have done for decades) or must only be applied to the materials component of the replacement cost and not the labor component (as plaintiffs’ lawyers have argued). For more background on this issue, see my February 10, 2016 blog post and January 18, 2016 blog post. This is currently the hottest issue in class actions against property/casualty insurers. It likely will get even hotter after these recent decisions.

There have been three recent federal district court decisions granting class certification in these cases. The first one was Labrier v. State Farm Fire & Cas. Co., 2016 U.S. Dist. LEXIS 96476 (W.D. Mo. July 25, 2016). The court found that the commonality requirement was satisfied because of “the overarching, undisputed, and common fact of State Farm’s practice of withholding payment from all its insureds for the depreciated labor component of mixed items of loss,” and because of the central legal issue, which had been decided (see my January 18, 2016 blog post for discussion of that decision). The court also found that the requirement that common issues of law or fact predominate was satisfied because “[t]he record shows that State Farm used the same method for calculating the ACV payment for each member of the class regardless of the type of casualty suffered or any other factor.” Id. at *16, 30.  The court also relied upon the testimony of a State Farm adjuster, who testified that State Farm used the Xactimate software to prepare estimates, and he “could not recall ever adjusting a claim without an Xactimate estimate, or any instance in which Xactimate was inaccurate.” Id. at *33. The court ultimately found that “[t]he putative class members’ damages are data driven and can be mechanically calculated.” Id. at *47. State Farm has filed a petition for permission to appeal this decision in the Eighth Circuit.

Following the decision in Labrier, two decisions granting class certification were issued by Judge Susan O. Hickey of the Western District of Arkansas, in Dennington v. State Farm Fire & Cas. Co., Case No. 4:14-cv-04001 (W.D. Ark. Aug. 24, 2016) and Green v. American Modern Home Ins. Co., Case No. 4:14-cv-04074 (W.D. Ark. Aug. 24, 2016). In Arkansas, the state supreme court had previously ruled that depreciation of labor costs was improper, as explained in my January 18, 2016 blog post. In Dennington and Green, the court found commonality satisfied based on the common legal issue of whether it is proper to apply depreciation to the entire estimated replacement cost value (including both the labor and materials components thereof). The court also found that the predominance requirement was satisfied because, although individual file reviews would be required, the court did not believe that “mini-trials” would be necessary on individual claims. The court noted that, to the extent that the estimates on some claims may have been overly generous and thus no additional amount would be owed under the Arkansas Supreme Court’s decision, or the class members were otherwise fully compensated by what was paid, the evidence did not establish that this would apply to a “significant portion” of the putative class claims. The court also concluded that identifying class members who were paid full replacement cost could be determined by common proof (although the court did not explain how this could be done). In Green, the court found that the amount of labor depreciation could be determined from a search of the insurer’s data on approximately 65% of the claims, and that the need for a file-by-file review on the remainder was not a sufficient basis to deny certification. The insurers likely will petition the Eighth Circuit for permission to appeal.

Assuming the Eighth Circuit decides to review some or all of these class certification decisions — and I expect it will, given that there are many labor depreciation class actions pending in that circuit (including ones I am involved in defending) – the Eighth Circuit will be faced with deciding issues of substantial importance to the insurance industry. If review is granted, the case potentially could have broad implications for insurance class action litigation, at least in that circuit. The key focus is likely to be on commonality and predominance. On commonality, other circuits have ruled that a legal issue that has already been decided (such as the “labor depreciation” issue here) cannot be a proper common issue. See Pipefitters Local 636 Ins. Fund v. Blue Cross Blue Shield, 654 F.3d 618, 630 (6th Cir. 2011). On predominance, as the Supreme Court recently explained, it would violate the Rules Enabling Act to “giv[e] plaintiffs and defendants different rights in a class proceeding than they could have asserted in an individual action.” Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016). If one of these “labor depreciation” cases were tried individually, it seems likely that the insurer would be allowed to put on evidence that nothing more is owed on the claim. This would go to liability, not necessarily or exclusively an affirmative defense. Assuming that the right to put on this type of evidence cannot be taken away from the insurer simply because the proceeding is a class action (as Tyson Foods and other cases explain), then a key question should become how many individual trials will be needed and whether the district court could feasibly conduct them. If it would be hundreds or thousands of individual trials, a class proceeding would seem to be unworkable.