A recent opinion by the Western District of Pennsylvania reminded me of an interesting wrinkle of class action law:  the decertification of a class that was previously certified typically has binding impact on the class members, preventing further attempts to seek certification of the same or a similar proposed class.  But as we know from the Supreme Court’s decision last Term in Smith v. Bayer Corp., 131 S. Ct. 2368 (2011) (see my blog post about that decision), a denial of class certification does not have preclusive effect.  Why is it that a defendant who first loses on class certification and then wins later on what amounts to reconsideration (partial or complete) achieves a result that a defendant who wins on class certification the first time does not?  The reason for this is simply that the class members had adequate notice of the original certification so they are bound by the decertification.  But is there a way a defendant can achieve the same binding result when class certification is denied the first time?  Perhaps this result could be achieved by asking the court to certify a class of all would-be class representatives, solely for the purpose of deciding whether class certification is appropriate, and providing notice to that class, so that the decision on class certification is binding.  Some might call it certifying a class for the purpose of deciding whether to certify a class.  An unusual, “out of the box” defense strategy for sure, but one that might work.

The recent decision that brought these issues to the forefront of my mind is West v. CUNA Mutual Insurance Society, Civ. A. No. 11-1259, 2012 U.S. Dist. LEXIS 19512 (W.D. Pa. Feb. 16, 2012).  If you have a great memory you’ll recall my June 9, 2011 post about the Third Circuit decision in Meyer v. CUNA Mutual Insurance Society, 648 F.3d 154 (3d Cir. 2011), a disability insurance class action, in which the district court certified a class, made a coverage ruling, issued an injunction, and then decertified the class.  The Third Circuit affirmed the coverage ruling but vacated the injunction, finding it improper in light of the decertification.  West was a putative class action brought on the same issue as Meyer, alleging that the defendant continued to violate the coverage ruling made in Meyer.  In a short opinion, the Western District of Pennsylvania held that collateral estoppel barred the plaintiffs, who were members of the class that was decertified in Meyer, from pursuing class certification.

In a sense, CUNA Mutual got lucky here because the class was certified and then later decertified. This is the kind of outcome a defendant who wins class certification would love to have—the defendant would much rather not have to re-litigate class certification a number of times after winning on the issue.  One way that this might be accomplished, although I’ve never seen it done, would be by asking the court the first time around to certify a class of would-be class representatives for the purpose of rendering one dispositive, binding ruling on class certification.  If anyone is aware of this ever being sought or accomplished I’d be interested to know about it.

I recently came across two new auto insurance class actions filed in West Virginia and Oklahoma, which I thought would be of interest to readers of my blog:

  • Smith v. State Farm Mutual Automobile Insurance Company, Civil Action No. 12-C-38 (Circuit Court of Ohio County, West Virginia), removed to federal court, Case No. 5:12-cv-0023-FPS (Northern District of West Virginia):  The complaint (pdf) alleges that State Farm’s auto policies violate a West Virginia statute to the extent the policies provide for nonduplication of benefits between medical payments coverage and underinsured motorist (UIM) coverage.  The plaintiff’s contention appears to be that duplication of benefits is required by W. Va. Code § 33-6-31(b) where it states that “[n]o sums payable as a result of underinsured motorists’ coverage shall be reduced by payments made under the insured’s policy or any other policy.”
  • Duval v. Farmers Insurance Exchange, Case No. CJ-20120213-TS (District Court of Cleveland County, State of Oklahoma):  The petition (pdf) in this suit alleges that, with respect to UM/UIM claims, Farmers improperly requires its insureds to sign authorizations that allow Farmers to obtain credit reports, psychological records, bank records, etc.  The complaint alleges that it is seeking less than $5 million on behalf of the class, likely to attempt to prevent removal to federal court.

Those readers who have followed my blog regularly will be familiar with my prior posts regarding class actions involving life insurers’ use of “retained asset” or “checkbook” accounts.  Under this arrangement, the insurer pays the proceeds of a life insurance policy to a beneficiary by providing a checkbook for an interest-bearing account from which the funds can be drawn at any time, rather than paying the benefits by a check for the lump sum.  (For prior posts on this, see my December 12, 2011 post and earlier posts cited in that one.)  On February 3, federal judges in the District of Maine and Eastern District of Pennsylvania issued significant new summary judgment rulings in these cases.  The Maine court granted partial summary judgment in favor of the plaintiffs and certified a class, while the Pennsylvania court granted summary judgment in favor of the insurer.  The inconsistent results here demonstrate that further appellate guidance will be necessary (to further that end, the Maine court certified its decision for interlocutory appeal to the First Circuit).

District of Maine Decision

In Merrimon v. UNUM Life Ins. Co., Docket No. 1:10-CV-447-NT, 2012 U.S. Dist. LEXIS 15516 (D. Me. Feb. 3, 2012), the Group Insurance Summaries of Benefits (GISB) explained in detail that life insurance benefits over $10,000 would be paid using a retained asset account, which would be an interest bearing account with an intermediary bank, from which the entire proceeds could be withdrawn at any time.  The GISB did not explain how the interest rate would be determined.  In fact, UNUM established the interest rate in its discretion, which it could change from time to time, and no money was transferred to the bank until a draft was presented to the bank for payment.  Cross-motions for summary judgment were filed regarding whether UNUM was acting as a fiduciary under ERISA in connection with the retained asset accounts, and whether it breached a fiduciary duty.  The issues were whether UNUM was a fiduciary under ERISA because it had: (a) discretionary authority or control of plan assets; or (b) discretionary authority or responsibility in the administration of the plan.  The court held that the funds backing the retained asset accounts were not “plan assets,” relying on a Second Circuit opinion and Department of Labor advisory opinion, and distinguishing a First Circuit decision.  The court also held, however, that UMUM had a fiduciary duty in administration of the plans and it breached that duty by not ensuring that the interest rate it was paying was the best available on the market:

The plans provide that payment will be by RAAs, which are defined as interest-bearing accounts established through an intermediary bank in the name of the beneficiary. When Unum chose to award itself the business of administering the Plaintiffs’ RAAs and chose to retain the assets backing these accounts, Unum was exercising its discretionary authority and responsibility in the administration of the Peabody and St. Joseph’s Plans.

In doing so, Unum chose to maximize its own profits by setting the RAAs’ interest rate just high enough to forestall mass withdrawal of the funds backing these accounts. The Court is unaware of whether there are banks or other institutions which would have bid on Unum’s book of RAA business, offering no-fee demand accounts on better terms than those offered by Unum. What is clear, however, is that Unum managed the RAAs to optimize its own earnings and not to optimize the beneficiaries’ earnings. Unum is not required to place its pool of funds with a third party. However, Unum-the-fiduciary is under an obligation to look at Unum-the-RAA-service-provider with a critical eye. If Unum wished to retain the RAA business for itself, as a fiduciary it was under an obligation to offer terms comparable to the best terms available on the market. Unum’s own research revealed that the 1% rate it provided was low compared to its competitors, which offered an average rate of about 2%, with some as high as 4%. Although further factual development would be required to determine the reasonableness of the interest rate at any particularly point in time, this evidence of competitors’ rates suggests that Unum was acting in its own self-interest, not solely in the interest of the beneficiaries, in setting the interest rate. Accordingly, Unum has breached its fiduciary duty to the Plaintiffs under ERISA Section 404(a), and the Plaintiffs are entitled to partial summary judgment as to liability on this claim.

Id. at *23-25 (emphasis added).  Judge  Torresen further explained that the plans would pass muster, in her view, if the plan documents had explained how the interest rate would be calculated, such as by tying the interest rate to a specific index.  Id. at *26 & n.3.

The court also granted certification of a class of beneficiaries under ERISA plans administered by UNUM with the same contract language.  It concluded that UNUM’s decision to set the interest rate in a manner that would serve its own interest “affected all of the beneficiaries in a similar manner,” and thus “the Plaintiffs’ varying motivations for leaving money in these accounts are not relevant to Unum’s liability or to the calculation of damages.”  Id. at *40.  The court further concluded that the viability of individualized statute of limitations defenses would require additional discovery, and might result in subclasses.  The court certified its entire order for interlocutory appeal to the First Circuit under 28 U.S.C. § 1292(b).

Eastern District of Pennsylvania Decision

In Edmonson v. Lincoln National Life Insurance Company, Civ. A. No. 10-4919, 2012 U.S. Dist. LEXIS 14142 (E.D. Pa. Feb. 3, 2012), the retained asset accounts operated in essentially the same fashion as in Merrimon – no funds were transferred to the bank until a check was drawn on the account, and until that happened the funds would be kept in the insurer’s general asset account.   The Lincoln National policy in this case was silent with respect to the use of a retained asset account.  The policy provided for payment of death benefits “immediately” upon receipt of satisfactory proof of claim.  The court rejected the plaintiff’s argument that “immediately” meant in a lump sum, concluding that “[f]or the Court to construe the term ‘immediately’ as the equivalent of ‘lump sum’ would not only be a stretch; it would essentially be a reformation of the Policy.”  Id. at *38.  The court granted summary judgment in favor of Lincoln National, concluding that, because plaintiff could withdraw the full benefits from the account at any time after it was opened, “by shifting practical control over Plaintiff’s death benefits to her directly, Lincoln discharged its fiduciary obligations under ERISA.”  Id. at *42.  The court further concluded that the funds that backed the retained asset accounts were not “plan assets” because the employee benefit plan did not have any interest in them when they were placed into the retained asset accounts.  Id. at *54.

The bottom line I see here is that, given the disparate results courts have reached thus far, until there is more appellate guidance, life insurers are going to have difficulty structuring their plans in a manner that they can be confident will pass muster throughout the country.  The approach Judge Torresen of the District of Maine suggests – laying everything out in the policy and using an indexed interest rate – may make some sense, but even if that method is used there is of course no guarantee it will satisfy every court.

The Sixth Circuit recently ruled in a health insurance case that a claim for a declaratory judgment regarding insurance contract interpretation could be certified under Rule 23(b)(2) under Wal-Mart v. Dukes, even if the declaratory relief would be a predicate to monetary relief, under which certification was sought under Rule 23(b)(3) but not yet ruled upon.  This decision is significant for insurers faced with opposing class certification under Rule 23(b)(2).

Gooch v. Life Investors Insurance Company of America, Nos. 10-5003/5723, 2012 U.S. App. LEXIS 2643 (6th Cir. Feb. 10, 2012) is a class action brought under a cancer insurance policy.  The plaintiff contends that the policy requires payment of the full “list prices” on medical bills, rather than the lower prices that are accepted as full payment by the medical providers (the idea seems to be that the insureds would get to pocket the difference).  The Sixth Circuit’s opinion is lengthy and involves a number of issues.  The court rules that a nationwide class action settlement by the defendant in Arkansas was binding and prevented the plaintiff from seeking certification of a class that overlapped with the class in the Arkansas case, but did not prevent the plaintiff from seeking certification of a class that did not overlap with the class in the Arkansas case (e.g., a different time period or a potential class of opt-outs). 

What I found most significant was the court’s ruling that class certification was appropriate on a declaratory relief claim under Rule 23(b)(2) on an issue of insurance contract interpretation.  The court wrote as follows:

[Plaintiff] requested that the district court certify a “Declaratory Relief Class . . . pursuant to Rule 23(b)(2) . . . and, at such time as the Court deems proper, then certify the Restitution/Monetary Relief Sub-Class as a class action pursuant to Rule 23(b)(3).” R. 1 (Compl., Prayer for Relief A) (emphasis added). He explicitly asked the court to enter a declaratory judgment separate from the request for restitution and monetary damages, which would be the subject of a distinct sub-class certified under a different subsection of Rule 23.[15] Id. at Prayer for Relief B, C; see also id. ¶¶ 71, 88. He did not “combine any claim for individualized relief with [his] classwide injunction.” Wal-Mart, 131 S. Ct. at 2558. The point is not simply that declaratory relief predominates over monetary relief or that monetary relief is incidental to declaratory relief. It is that, in this case, declaratory relief is a separable and distinct type of relief that will resolve an issue common to all class members.

Not every class member will have a claim for damages because some presumably did not make a claim for payment after the May 2006 policy clarification. Still, the declaratory judgment will apply to a uniform interpretation of a contract that governs or governed each class member, making Rule 23(b)(2) certification appropriate. “All of the class members need not be aggrieved by . . . [the] defendant’s conduct in order for some of them to seek relief under Rule 23(b)(2). What is necessary is that the challenged conduct or lack of conduct be premised on a ground that is applicable to the entire class.” 7AA Wright & Miller, supra, § 1775. “It is sufficient if class members complain of a pattern or practice that is generally applicable to the class as a whole. Even if some class members have not been injured by the challenged practice, a class may nevertheless be appropriate.” Walters v. Reno, 145 F.3d 1032, 1047 (9th Cir. 1998). “The key to the (b)(2) class is `the indivisible nature of the injunctive or declaratory remedy warranted—the notion that the conduct is such that it can be enjoined or declared unlawful only as to all of the class members or to none of them.'” Wal-Mart, 131 S. Ct. at 2557 (quoting Nagareda, 84 N.Y.U. L. Rev. at 132). Because Life Investors interprets the phrase “actual charges” the same way for each policyholder, uniform declaratory relief is appropriate.

This point also disposes of Life Investors’s contention that the district court’s “piecemeal certification” of a single count of Gooch’s complaint “does not materially advance the litigation.” Appellant 10-5723 Br. at 53.[16] We find nothing objectionable about the district court certifying one count of Gooch’s complaint, an approach that we have affirmed in the past. See Beattie, 511 F.3d at 568. In sum, certifying declaratory relief under Rule 23(b)(2) is permissible even when the declaratory relief serves as a predicate for later monetary relief, which would be certified under Rule 23(b)(3).

Id. at *56-59.  The court also noted in a footnote that it did not view claim splitting as a problem for piecemeal certification in this case.  Id. at *59 n.16.  The court does not really address whether certification under Rule 23(b)(2) would remain proper if the district court concludes that a (b)(3) class for damages is improper, an issue not yet addressed by the district court.  The district court ruling was vacated and remanded for further proceedings.

This decision seems somewhat inconsistent, for example, with the Seventh Circuit’s opinion last year in Kartman v. State Farm Mut. Auto. Ins. Co., 634 F.3d 883 (7th Cir. 2011) (blog post), in which the Seventh Circuit explained that “Rule 23(b)(2) governs class claims for final injunctive or declaratory relief and is not appropriately invoked for adjudicating common issues in an action for damages,” which seems to be how declaratory relief is sought to be used in Gooch.  Id. at 895.

I expect this decision could lead to more attempts by policyholders to seek certification of Rule 23(b)(2) classes for declaratory relief against insurance companies on issues of contract interpretation.  Stay tuned.

Issues regarding the use of statistical evidence at trial of a class action were recently addressed by the California Court of Appeal, First Appellate District, in Duran v. U.S. Bank Nat’l Ass’n, 2012 Cal. App. LEXIS 107 (Cal. Ct. App. Feb. 6, 2012).  The court concludes that the trial of an employment class action (seeking unpaid overtime) through the use of statistical evidence, where the court refused to allow the defendant to put on evidence of defenses to individual claims (such as that particular employees qualified as exempt), was not only contrary to California’s class action standards but a violation of due process.  The appellate court found the error here sufficiently egregious that it decertified the class and did not send the case back for another trial.  The court discussed Wal-Mart v. Dukes at some length, finding that “[t]he same type of ‘Trial by Formula’ that the U.S. Supreme Court disapproved of in Wal-Mart is essentially what occurred in this case.”  Id. at *102.  In Wal-Mart, the Supreme Court disapproved of a proposed trial plan  whereby a sample set of class members’ claims for backpay would be tried, and the result extrapolated to the entire class.  The Supreme Court concluded, unanimously, that “[a] class cannot be certified on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims.”  

A recent article by Judy Greenwald in Business Insurance suggests that this decision will have broad implications for class actions in California and beyond: 

The ruling by an appellate court in California that dismisses a class action wage-and-hour lawsuit by bank employees is expected to lead to a dramatic reduction in the number of class actions filed in the state and could be highly influential nationally, observers say.

The Business Insurance article may be going a bit too far.  In my view, this decision is certainly important, but I don’t think it’s a surprising result that a defendant should be entitled to put on its defenses, and I don’t think it means the end of class actions (and after all, this is only one intermediate appellate court in one jurisdiction). 

What I think this decision means is that courts need to pay more attention to defenses in deciding class certification, and defendants should highlight defenses prominently in opposing certification.  Here is a key part of the opinion:

Class action lawsuits are intended to conserve judicial resources and to avoid unnecessarily repetitive litigation. Efficiencies must be maintained, sometimes resulting in imperfect results. A certain amount of variability can be tolerated. However, the trial management plan followed here prevented USB [the defendant] from submitting any relevant evidence in its defense as to 239 class members out of a total class of 260 plaintiffs. Whether the trial court would have given credence to such evidence is beside the point. A trial in which one side is almost completely prevented from making its case does not comport with standards of due process.

Id. at *114-15.

If plaintiffs think that defendants are conjuring up meritless defenses to defeat class certification, they can move to strike them or seek summary judgment on them.  But if a defense is valid and a defendant would be entitled to put on evidence in support of it in an individual trial, under this decision (and Wal-Mart), the defendant must have the right to put on its defense, in some reasonable manner, in a class action trial.  The California Court of Appeal made clear that they did not see their decision as making it impossible to try this kind of class action, nor was the court saying that statistical methods could never be used, but such a trial would have to be conducted in a manner that adequately protected the defendant’s rights to present individual defenses.  Because this is a due process requirement, it is not something the trial court has any discretion over.

I also found interesting that the parties and the court agreed here that, while a ruling on class certification is reviewed for abuse of discretion, the court “review[ed] de novo the legal issue of whether a trial plan violated a party’s right to due process.”  Id. at *74.  That by itself is an important reason to make due process arguments in opposing class certification, and in motion practice relating to how a class action trial will be conducted.

This week there has been some buzz in the insurance industry media and Florida media about a new class action filing against Citizens Property Insurance Corporation, the state-sponsored property insurer of last resort in Florida, and Xactware Solutions, Inc.  The case, Freitas v. Citizens Property Insurance Corporation, was filed in the Circuit Court of the 6th Judicial District, in Pasco County, Florida (Case No. 512012CA0799WS).  The Freitas v Citizens Property complaint.pdf alleges that Citizens purchased the 360Value software from Xactware, and purportedly manipulated the software to inflate the replacement cost value of homes, thereby inflating the premiums charged.  The proposed class is all Citizens policyholders who purchased a policy where Value360 was used to determine replacement cost.  The sole claim alleged in the complaint is for violation of Fla. Stat. § 627.351(6)(a)(1), which sets forth the legislative purpose for the creation of Citizens, including that Citizens “shall strive to increase the availability of affordable property insurance in this state . . . .”  The case also seeks injunctive relief requiring Citizens to stop using 360Value or modify its use so that determinations of replacement cost are more accurate. 

According to Tampa Bay’s Channel 10, Citizens apparently has changed its practices in response to the lawsuit and is now allowing insureds to use their own estimates of replacement cost.  Channel 10 also reports that the plaintiffs’ lawyers who filed this suit are planning to sue other insurance companies (not yet identified, except that Universal Property Insurance is mentioned in an article). 

A couple thoughts: 

  • The Florida statute that is cited as the sole basis for the complaint against Citizens and Xactware appears to be a hortatory statute regarding the general purpose and intent behind the creation of Citizens as a state-created entity.  Does this statute really create an enforceable legal obligation, let alone a private right of action that insureds can bring suit under?  How does it create any basis for a suit against Xactware?  How could it be the basis of a claim against a private insurer other than Citizens? 
  • Given that Florida has a valued policy law, assuming the allegations were true, why would an insurer encourage (or require) overinsurance?  In the event of a covered total loss, a valued policy law requires payment of the full policy limit, and in that respect is intended to create a strong incentive for insurers not to allow overinsurance (and the moral hazard it creates).  If Citizens is charging much more than appropriate for premiums, it also will be paying out much more for total losses.   

In any event, given the attention this new filing is getting, insurers that use Xactware’s 360Value or other similar software should take a careful look at how they are using it in light of these allegations.

I found interesting a recent blog post by Claire Wilkinson of the Insurance Information Institute (III) reporting that:

In a new record, nearly 520,000 insurance claims disputes valued at more than $2.4 billion were resolved via arbitration in 2011, Arbitration Forums Inc reports.

According to AF, the nation’s largest provider of inter-insurance dispute resolution services, it is saving the property/casualty insurance industry more than $700 million in litigation costs annually.

. . .

Some 98 percent of the arbitration filings in 2011 were made electronically, via AF’s electronic subrogation claims system known as E-Subro Hub – more than twice the percentage of a few years earlier.

. . .

E-Subro Hub significantly streamlines the process by enabling users to electronically send and receive subrogation demands, attach supporting documents, manage subrogation claims and electronically file inter-company arbitration where necessary.

The question I have is whether this kind of positive outcome would extend to arbitrations between insurers and their personal lines insureds.  Regular readers of my blog will recall that I’ve mused on several occasions (see my August 22, 2011 blog post, for example) about whether insurers might increase the use of arbitration, with arbitration clauses that preclude class actions, in order to take advantage of the Supreme Court’s decision last year in AT&T v. Concepcion.  The data recently reported by the III suggests that arbitration can achieve substantial costs savings where there are sophisticated entities (insurers) on both sides and proceedings are streamlined.  Some of that simplification could be used in small consumer arbitrations, and indeed might be welcomed by many policyholders (and by insurance commissioners) as a good alternative to costly and lengthy litigation.  Even as an insurance lawyer I might be more inclined to buy coverage from a company that offers a fair and simple arbitration process for resolving small claim disputes.  But expanding consumer arbitrations in insurance also raises some issues that would not be reflected in the data regarding inter-company arbitration, including:

  • Will there be many more contested and lengthy arbitration proceedings because individual insureds will not operate as rationally as a sophisticated entity on the other side of the dispute?  Will that add substantial cost?  Can that problem be ameliorated through the procedures employed for insured-insurer arbitrations?
  • To what extent will plaintiffs’ lawyers increase indemnity payments and arbitration costs by pursuing arbitrations that they would never bother to pursue in court, if the arbitrations are easier, faster and potentially have a minimum award for a prevailing plaintiff?
  • Will there be more frivolous arbitrations than frivolous lawsuits?  Can a provision be built into the arbitration clause that reduces the filing of frivolous arbitrations by imposing costs on insureds if the arbitrator finds the case frivolous?
  • Will the prohibition on class actions and costs savings generated thereby outweigh any additional costs from the individual arbitrations?

I’d be interested to know if anyone has, or is aware of, any data regarding whether and how cost savings can be achieved by using consumer arbitrations in insurance (if there is any), or other industries that might be somewhat analogous.   

On January 30, I published a blog post about a Southern District of New York decision holding that an arbitration clause barring class actions was unenforceable because the costs of an individual arbitration effectively would preclude the plaintiff from pursuing her statutory rights under the Fair Labor Standards Act.  The Second Circuit has now reached a similar result in In re American Express Merchants’ Litigation, No. 06-1871-cv, 2012 U.S. App. LEXIS 1871 (2d Cir. Feb. 1, 2012).  I’m not sure this result or the court’s rationale has much, if any, application to insurance, for reasons I’ll explain below.  But it’s nevertheless important to take this decision into account as insurers consider expanding the use of arbitration after Concepcion.

The American Express Opinion

American Express is a long-running antitrust case brought by merchants who allege that AmEx has used an illegal “tying arrangement,” in violation of the Sherman Act, under which merchants must accept AmEx revolving credit cards and pay higher fees to AmEx for those transactions than are charged by Visa or MasterCard.  AmEx’s ability to charge these higher fees is allegedly tied to its charge card business (i.e., cards requiring payment in full every month), which has more corporate cardholders and affluent individual cardholders.  AmEx’s contract with merchants requires them to accept all AmEx cards, and it has an arbitration clause with a class action waiver in it.  The plaintiffs argued that the class action waiver was unenforceable because it effectively deprives merchants of the ability to bring any antitrust claims, on the theory that the cost of bringing an individual antitrust suit far outweighs the potential individual recovery.  The plaintiffs presented, and the Second Circuit relied on, testimony from an antitrust expert that the cost of an expert report in this case would be roughly in the middle of a range between $300,000 and $2 million, which far exceeded what any named plaintiff could recover in an individual proceeding.

The Second Circuit concluded that the issue presented by the American Express case was not decided or even addressed by the Supreme Court in AT&T v. Concepcion or Compucredit Corp. v. Greenwood.  The Second Circuit noted that “Supreme Court precedent recognizes that the class action device is the only economically rational alternative when a large group of individuals or entities has suffered an alleged wrong, but the damages due to any single individual or entity are too small to justify bringing an individual action.”  Id. at *25.  The court also found guidance from the Supreme Court in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985), Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).  The court interpreted these three opinions, particularly Green Tree, as recognizing that class action waivers in arbitration clauses are unenforceable if the plaintiff can establish, with convincing proof, that “class-action waivers barred them from vindicating their statutory rights.”  Id. at *34.  The Second Circuit found AmEx’s class action waiver unenforceable because the cost of expert testimony to prosecute an individual antitrust arbitration would make it impossible for an individual plaintiff to pursue an antitrust claim and AmEx would have essentially immunized itself against any and all such claims.  The result, given that parties cannot be forced to arbitrate in a class proceeding (under the Supreme Court’s decision in Stolt-Nielsen) was that a class action can proceed in court.

Applicability to Insurance

I’d expect plaintiff’s lawyers to attempt to develop factual support similar to that used in American Express and then rely on this case in opposition to defendants’ efforts to invoke AT&T v. Concepcion.  However, I’m not sure this decision will apply in the insurance context for several reasons:

  • Insurance class actions hardly ever involve federal statutory rights because the states control insurance regulation.  Even if Congressional intent behind other federal statutes may control vis-à-vis the Federal Arbitration Act (FAA) in this circumstance, I’m not sure the same would be true of state common law or statutory rights that may conflict with the FAA.
  • Insurance class actions on claims or underwriting issues rarely involve circumstances where it would be impossible for an individual plaintiff to arbitrate an individual claim because the cost of arbitration would exceed the potential recovery.  The kind of expensive expert testimony that is required for an antitrust case is rarely necessary in an insurance class action.  State law also frequently provides mechanisms whereby statutory penalties or attorneys’ fees potentially become available that make individual disputes practical to arbitrate or litigate.  AmEx’s arbitration clause exempts small claims lawsuits from the arbitration requirement, which is something insurers may wish to consider as well.
  • Even where individual claims are small and dispute resolution costs large, it may not be impossible to vindicate individual claimants’ rights outside of the class action mechanism, if a large number of claimants wish to pursue claims and they do so in a coordinated fashion (but not through a formal class action mechanism).  Individual claimants and their attorneys generally are free to join resources and jointly retain and pay for experts or other collective costs.  An arbitration clause with a class action waiver cannot bar numerous claimants from signing up with the same lawyer and filing thousands of individual arbitrations.  They can also take advantage of collateral estoppel against the defendant where it is available under applicable law in the arbitration context.  Even in the American Express case that would seem to me to be a potential option not considered by the Second Circuit (although I’m not an authority on antitrust law or how those cases proceed).  What this means, as a practical matter, is that plaintiffs’ lawyers need to sign up a large number of clients who want to pursue claims rather than just finding one client and bringing a class proceeding.  Requiring this to happen in order for a large proceeding to go forward effectively limits mass proceedings to those driven somewhat more by the plaintiffs than by their lawyers.  If the mass proceeding is not viable unless thousands of people who feel they have been harmed sign up to pursue their claims, plaintiffs’ lawyers are more limited in their ability to pursue claims that have less merit because they will not be able to find enough clients to make it worthwhile.  But defendants who have engaged in an improper practice that harms many consumers who have meritorious grievances will not escape unscathed if plaintiffs’ lawyers can aggregate claims in this fashion.     

A February 2, 2012 decision by the Eighth Circuit upheld the use of stipulations by the named plaintiff and plaintiff’s counsel attempting to limit the amount in controversy to below the $5 million threshold for federal jurisdiction under the Class Action Fairness Act (CAFA).  This is the first court of appeals opinion squarely addressing this important issue.  If followed by other circuits, this decision potentially allows any plaintiffs’ attorney to avoid federal jurisdiction in any class action, no matter how large the amount in controversy would otherwise be, simply by using stipulations following the form used in this case.  CAFA potentially becomes avoidable essentially at will.  Such stipulations might make little difference to a defendant if the state’s class action law closely follows federal law, the state courts are accustomed to handling complex commercial disputes and discovery rulings are reasonable and appealable.  However, the plaintiffs’ bar is more likely to employ these stipulations in state courts that have looser class certification standards, plaintiff-friendly courts and limited (or non-existent) appellate review of discovery rulings preceding certification.  In those jurisdictions, defendants can be pressured to settle by the larger costs of litigation and greater likelihood of class certification.

In Rolwing v. Nestle Holdings, Inc., No. 11-3445, 2012 WL 301030 (8th Cir. Feb. 2, 2012) (available at Eighth Circuit website), a proposed class action was filed arising out of a merger between Nestle and Ralston Purina Company.  The plaintiff contended that payments to Ralston Purina shareholders for their shares were made six days late, and thus, under the interest rate established in a Missouri statute, over $13 million was owed to the shareholders.  The complaint, however, included allegations and two stipulations attempting to limit the amount in controversy to below $5 million, as follows:

Rolwing’s complaint included a prayer for relief requesting “judgment against defendant in an amount that is fair and reasonable in excess of $25,000, but not to exceed $4,999,999.”  The prayer stated further:  “Plaintiff and the class do not seek –and will not accept – any recovery of damages (in the form of statutory interest) and any other relief, in total, in excess of $4,999,999.”   . . . Rolwing also included two stipulations with his complaint: one stating that as named plaintiff and putative class representative he would not seek or accept any recovery in excess of $4,999,999 on his own behalf or on behalf of the class, and a second signed by his counsel stating that no attorneys’ fees would be sought or accepted other than on a contingency basis out of the maximum recovery of $4,999,999 provided for by the other stipulation.

Id. at *1 (emphasis in original). 

The Eighth Circuit initially found that Nestle had established that the actual amount in controversy exceeded $5 million, and thus, “for a remand to be justified, Rolwing must show that it is legally certain that recovery in this case cannot exceed $5 million.”  Id. at *2.  The court stated that “[s]tipulations of this sort, when filed contemporaneously with a plaintiff’s complaint and not after removal, have long been recognized as a method of defeating federal jurisdiction in the non-CAFA context.”  Id.   The court did not address whether this should be extended to CAFA or what Congress intended in that regard.  The court concluded that the stipulations were enforceable under  Missouri law of judicial estoppel, reasoning as follows:

Under Missouri law, “[t]he doctrine of judicial estoppel provides that ‘[w]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.’ “ Taylor v. State, 254 S.W.3d 856, 858 (Mo.2008) (second alteration in original) (quoting Zedner v. United States, 547 U.S. 489, 504, 126 S.Ct. 1976, 164 L.Ed.2d 749 (2006)). According to this rule, by defeating removal through asserting the position that he will not accept more than $4,999,999 in damages on behalf of the class he is seeking to represent, Rolwing is estopped from later accepting damages that exceed that amount. Similarly, by taking the position that he would only accept fees on a contingency basis out of damages not exceeding $4,999,999, Rolwing’s counsel is estopped from accepting any other fee award.

Id. at *3 (emphasis added).

A few observations:

  • The Eighth Circuit here seemed to assume that pre-CAFA law allowing stipulations that the amount in controversy in an individual case was below $75,000 should be extended to apply to class actions under CAFA.  Doesn’t resolving that issue depend on:  (1) whether class action law allows a named plaintiff to stipulate to damages on behalf of proposed class members pre-certification; (2) whether such a stipulation is binding pre-certification; and (3) what Congress intended in enacting CAFA?  None of these issues were addressed in this decision.
  • The law on judicial estoppel varies somewhat from state to state, as well as the law regarding the enforceability of these types of stipulations, so the application of this opinion in cases arising from other jurisdictions may vary. 
  • It seems somewhat inconsistent with principles of federalism for federal jurisdiction to depend on the vagaries of state law, although to some extent state law informs the determination of the amount in controversy under diversity jurisdiction.  Should state law be allowed to completely control whether federal courts have jurisdiction under CAFA?
  • If this decision is not consistent with Congressional intent, should CAFA be amended to correct it?

Regular readers of my blog may recall that my post last week about the ABA Premier Speaker Series webinar on class actions described how Mark Perry had made an interesting point that courts should focus more intently on Rule 23(c)(1)(B).  This is a sometimes overlooked subsection of Rule 23 that requires an order certifying a class to “define the class and the class claims, issues, or defenses . . . .”  Coincidentally enough, only a few days after Mark Perry’s comments, the Seventh Circuit issued a new decision focusing on this very issue, an issue of first impression in that circuit. 

In Ross v. RBS Citizens, N.A., No. 10-3848, 2012 U.S. App. LEXIS 1478 (7th Cir. Jan. 27, 2012), the court strongly enforced Rule 23(c)(1)(B) as written, requiring district courts to specifically and precisely describe each claim, issue or defense to be treated on a class basis.  My takeaway is that this decision provides insurers and other defendants with an important angle to focus the court on the importance of specific issues and defenses that they do not believe can be tried on a class basis, and thereby strengthen their arguments in opposition to certification.  Andrew Trask made a similar point in a recent post about this case on his Class Action Countermeasures blog.  I think this case also demonstrates that the importance of giving careful thought at the class certification stage to how the defendant would try a class action and all of the defenses you would want to raise at trial.  There is some risk that if a defense is not included in a class certification order that is detailed as provided for in Rule 23(c)(1)(B), the court might not include the defense in a trial plan or allow it to be presented at trial.  This new opinion also had a somewhat troubling footnote regarding the applicability of the “Trial by Formula” portion of the Supreme Court’s opinion in Wal-Mart v. Dukes, which I address below.

Ross was a putative employment class action alleging violations of the Fair Labor Standards Act and Illinois Minimum Wage Law, alleging improper failure to pay overtime compensation.  The district court certified a class, and the lead issue raised on appeal was a claimed failure by the district court to comply with Rule 23(c)(1)(B).  After Wal-Mart v. Dukes was decided by the Supreme Court, the Seventh Circuit also asked the parties to brief its applicability to the case.

Rule 23(c)(1)(B)

The Seventh Circuit concluded that a “precise definition of the class, claims, issues and defenses” was necessary: (1) under the plain text of Rule 23(c)(1)(B); (2) in order to provide an appropriate basis for appellate review; and (3) so that parties can adequately prepare for a class action trial.  The court adopted the Third Circuit’s statement that a decision certifying a class is required to include:

(1) a readily discernible, clear, and precise statement of the parameters defining the class or classes to be certified, and

(2) a readily discernible, clear, and complete list of the claims, issues or defenses to be treated on a class basis.

Id. at *11 (quoting Wachtel ex rel. Jesse v. Guardian Life Ins. Co. of Am., 453 F.3d 179, 187-88 (3d Cir. 2006)).

The Seventh Circuit found this test satisfied in Ross because the district judge had adequately defined the class as everyone who had worked for the defendant bank in Illinois in certain positions over a three-year period, and had adequately defined the issues the plaintiffs sought to pursue regarding an allegedly unlawful overtime policy, and the defense that employees were exempt.  The opinion did not describe in much detail what the defendant claimed the deficiencies in the trial court order were, but the Seventh Circuit found the defendant’s contentions to be “merely issues of trial strategy or proof, rather than overall claims or issues necessitating resolution.”  Id. at *17.

Wal-Mart v. Dukes

On the issue of whether the district court’s finding on commonality satisfied the new standard in Wal-Mart v. Dukes, the Seventh Circuit held that commonality was satisfied.  It explained that the plaintiffs “maintain a common claim that [defendant] broadly enforced an unlawful policy denying employees earned-overtime compensation.  This unofficial policy is the common answer that potentially drives the resolution of this litigation.”  Id. at *23.  Not a surprising result on the facts of this case, a much smaller and much more focused case than Wal-Mart.

I was somewhat troubled, however, by the following footnote in the opinion:

Misreading Dukes, Charter One also contends that it has a statutory right to present its affirmative exemption defenses on an individualized basis, and thus, there is no commonality. However, the Dukes passage the defendant cites in support of its argument discusses how the Ninth Circuit improperly certified a Rule 23(b)(2) class that sought equitable relief. In so ruling, the Court struck down the Ninth Circuit’s attempt to circumvent 42 U.S.C. § 2000e-5(g)(2)(A) by holding that Wal-Mart had a statutory right to avoid equitable damages by showing that “it took an adverse employment action for any reason other than discrimination.” Dukes, 131 S. Ct. at 2560-61 (emphasis added). Charter One has no such statutory right because both classes are seeking only monetary relief through a Rule 23(b)(3) class.

Id. at *21 n.7. 

Most commentators have been interpreting this part of the Wal-Mart opinion as having a broader reach than merely applying to equitable claims sought to be certified under Rule 23(b)(2).  The Supreme Court wrote that “[b]ecause the Rules Enabling Act forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right,’ a class cannot be certified on the premise that Wal–Mart will not be entitled to litigate its statutory defenses to individual claims.”  Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2561 (2011) (citations omitted).  As I, and a number of other commentators have read this, the Supreme Court was saying that, because the procedural mechanism of a class action cannot modify substantive rights, a trial court cannot disregard a defendant’s right to present individual defenses where it would have that right under applicable substantive law.  The Supreme Court’s rationale did not seem narrowly applicable only to equitable claims.  I am not sure if the Seventh Circuit thoroughly considered this Rules Enabling Act issue in its footnote.  The issue is likely to arise in a number of future cases, and time will tell.