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Effective But Often Overlooked Strategies for Defeating Class Actions
Brought to you by Winston & Strawn’s Class Action Practice Group.
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Today’s eLunch Presenters
© 2011 Winston & Strawn LLP
Neal Marder
Christian Dodd
Litigation Los Angeles
Litigation Los Angeles
[email protected]
[email protected]
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The Knockout Blow: Overview of Potential Strategies
Moving to strike class allegations Moving preemptively for an order denying class certification Pleading compulsory counterclaims Showing a class action is not the superior method of adjudication under Rule 23(b)(3) through: Voluntary refund programs Administrative remedies
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Hypothetical 1 Plaintiff is a former sales employee of Defendant ABC Electronics (“ABC”), a nationwide retailer of consumer electronic products. During the course of his employment, Plaintiff purchased a television from ABC (using his employee discount) along with an extended warranty offered by ABC. Several years later, and after Plaintiff left ABC’s employ, Plaintiff seeks warranty service on his television. He is charged for “special labor,” which falls outside the coverage of the warranty. Plaintiff thereafter files a nationwide class action against ABC, alleging that the extended warranty program is a sham in that the true costs of a “warranted” repair nearly always exceed the costs as represented. Plaintiff asserts causes of action for fraud and breach of express warranty. © 2011 Winston & Strawn LLP
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Strategy – Move to Strike Class Allegations
Potential arguments: Plaintiff is necessarily an inadequate class representative due to his conflict of interest with the class. Plaintiff’s claims are not typical of those of the class. Individual issues will necessarily predominate.
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Legal Authority for Moving to Strike Class Allegations
The court may strike from a pleading “any redundant, immaterial, impertinent, or scandalous matter.” F.R.C.P. 12(f) (emphasis added). “At an early practicable time after a person sues or is sued as a class representative, the court must determine by order whether to certify the action as a class action.” F.R.C.P. 23(c)(1)(A). The court may issue an order that “require[s] that the pleadings be amended to eliminate allegations about representation of absent persons and that the action proceed accordingly.” F.R.C.P. 23(d)(1)(D).
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Wright v. Family Dollar, Inc., No. 10C4410 (N.D. Ill. Nov. 30, 2010)
The Court granted Defendant’s motion to strike on the grounds that the allegations in the Complaint demonstrated that Plaintiff would be unable to establish the typicality or adequacy of representation elements under F.R.C.P. 23(a). “[W]hen the defendant advances a legal argument based on the pleadings, discovery is not necessary for the court to determine whether a class action may be maintained.”
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In re Yasmin and Yaz Mktg. Litig., MDL No. 2100 (S.D. Ill. May 4, 2011)
“[D]efendants have identified numerous facial deficiencies in the class allegations; no amount of time or discovery can cure these deficiencies.” “Here, the Court’s analysis begins and ends with Rule 23(b)(3); it is evident that individual questions of law and fact predominate, and therefore the case is not manageable as a nationwide or statewide class action.” The Court struck the class allegations.
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Sanders v. Apple, Inc., 672 F. Supp. 2d 978 (N.D. Cal. 2009)
“Sometimes the issues are plain enough from the pleadings to determine whether the interests of absent parties are fairly encompassed within the named plaintiff’s claim.” “Courts routinely hold that both fraud and warranty claims are difficult to maintain on a nationwide basis and rarely are certified.” The Court granted the motion to strike, but suggested that Plaintiff should consider whether a more narrowly defined class might be appropriate.
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Lessons on Motion to Strike Cases
A motion to strike can succeed if Defendant can show based on the allegations in the Complaint that one or more of the Rule 23 requirements for class certification cannot be satisfied even if Plaintiff is permitted to take discovery. Pay particular attention to the jurisdiction. Some courts have found that a motion to strike the class allegations under F.R.C.P. 23(d) cannot be brought until after the court has determined under Rule 23(c)(1) that the maintenance of a class action is inappropriate. See, e.g., Korman v. Walking Co., 503 F. Supp. 2d 755 (E.D. Pa. 2007).
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Hypothetical 2 Plaintiff files suit against Defendant, a manufacturer and seller of GPS devices, alleging that the GPS device he purchased does not operate as represented by Defendant in its advertising materials or as warranted. Plaintiff sues on behalf of all purchasers of a particular model GPS device, alleging causes of action for fraud, negligent misrepresentation, false advertising, and breach of warranty. Through early discovery, it is learned that Plaintiff had purchased his GPS device for half the normal retail price on eBay from a private seller.
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Strategy – File a Preemptive Motion to Deny Class Certification
The early discovery suggests that Defendant has a strong argument that Plaintiff is not an adequate class representative and/or his claims are not typical of the class. As no amount of further discovery can cure these deficiencies, Defendant might consider filing a preemptive motion to deny class certification under F.R.C.P. 23(c)(1)(A).
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Vinole v. Countrywide Home Loans, 571 F.3d 935 (9th Cir. 2009)
“Nothing in the plain language of Rule 23(c)(1)(A) either vests plaintiffs with the exclusive right to put the class certification issue before the district court or prohibits a defendant from seeking early resolution of the class certification question. The only requirement is that the certification question be resolved ’[a]t an early practicable time.” “[T]he district court’s consideration of [Countrywide’s] motion would only be improper if Plaintiffs could show some procedural prejudice from the timing of the consideration.”
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Post-Vinole Motions to Deny Certification
Baker v. Big Lots, C.D. Cal. Case No. CV08-01450 Perry-Roman v. AIG Retirement Svcs., Inc., C.D. Cal. Case No. CV09-02287
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Sidebar Discussion re Hypothetical 2 If the named plaintiff is found to be an inadequate class representative, won’t plaintiff’s counsel be permitted to take discovery to identify a more adequate lead plaintiff?
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Hypothetical 3 Plaintiff purchased a product from Defendant XYZ store on credit, taking advantage of XYZ’s installment payment plan. Plaintiff, who has fallen behind on his payments, files a nationwide class action lawsuit alleging that XYZ breached its installment payment agreements with him and the class by adjusting the variable interest rate in a manner inconsistent with the terms of the agreement. Plaintiff alleges that all class members entered XYZ’s standard form agreement and that XYZ’s breaches of these agreements are systematic and uniform. © 2011 Winston & Strawn LLP
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Strategy — Assert Compulsory and/or Permissive Counterclaims
In its Answer, Defendant can assert both as a defense and as a counterclaim that Plaintiff and certain members of the class breached their respective agreements with Defendant by failing to timely make payments as they came due under the agreement. By asserting this counterclaim, Defendant may introduce individual issues that require separate factual determinations.
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Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir. 2004)
“In determining whether individual or collective issues predominate, we look not only to the plaintiff’s allegation, but also to any compulsory counterclaims that the defendant can be expected to bring or permissive counterclaims that defendant has already brought.” “[W]here a defendant files a counterclaim, he must adduce some evidence in support of it before a court will take it into account as a reason for declining to certify a class.”
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Shelley v. AmSouth Bank, No. 97-1170, 2000 WL 1121778 (S.D. Ala. July 24, 2000) “These counterclaims would require additional individualized determinations of damages accruing to the defendant, and counterclaim defendants would be required to raise individual defenses, such as waiver and estoppel.”
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Additional Examples
Carter v. Public Fin. Corp., 73 F.R.D. 488 (N.D. Ala. 1977) Parker v. George Thompson Ford, Inc., 83 F.R.D. 378 (N.D. Ga. 1979) Cotchett v. Avis Rent A Car System, Inc., 56 FRD 549 (S.D.N.Y. 1972)
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But see Pinkett v. Moolah Loan Comp., 1999 WL 1080596 (N.D. Ill. 1999) “Defendants also maintain that class certification is inappropriate because they may bring counterclaims against individual members of the putative class. Specifically, the defendants maintain that they may bring individual counterclaims against those individuals who have defaulted on their loans. However, it is well established that individual counterclaims or defenses do not render a case unsuitable for class certification.”
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Roper v. Consurve, Inc., 578 F.2d 1106 (5th Cir. 1978) “The lower court alluded to the potential problem of counter-claims… If the court should conclude at any time that the entire group of counter-claims makes the plaintiffs’ claims on behalf of such persons unmanageable, the court has the continuing authority under Rule 23 to issue a supplemental order excluding counter-claim defendants from the plaintiff class or separating and severing the class into two different classes, one with counter-claims and one without counter-claims.” © 2011 Winston & Strawn LLP
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Lessons from Filing Counterclaims
Defendants should consider whether they have any compulsory or permissive counterclaims against putative class members that may prevent certification of the class. By asserting counterclaims, a defendant may get the court focused on individual defenses and lack of commonality. Defendants should consider the jurisdiction, as there is no uniformity in how district courts will rule on this issue.
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Hypothetical 4 A seller of athletic shoes introduces a new running shoe. Due to a manufacturing defect, the heels of the first 200,000 pairs of shoes manufactured and sold wear down quickly, thereby diminishing the ability of the shoe to absorb the impact on the heel caused by running. The defective shoes are readily identifiable by a distinct marking left on the shoe by the faulty manufacturing process. Defendant seller seeks advice on how to address this issue.
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Strategy – Immediately Implement a Voluntary Refund Program
If Defendant has determined that it is likely to be liable to a class of persons, Defendant should consider immediately implementing an out-of-court refund program. If a class action is later filed on behalf of all purchasers of the defective shoes, Defendant may persuade the court that a class should not be certified because Defendant’s out-of-court refund program is superior to class action litigation.
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In re ConAgra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689 (N.D. Ga. 2008) “In this case there is no overriding factor suggesting class certification is superior. I find that a class action would not be the superior method to resolve the claims of the proposed purchaser class.”
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Turner v. Murphy Oil USA, Inc., 234 F.R.D. 597 (E.D. La. 2006) “[T]he merits of Murphy’s settlement program aside, Murphy’s argument confuses the superiority standard under Rule 23. The analysis is whether the class action format is superior to other methods of adjudication, not whether a class action is superior to an out-ofcourt private settlement program.”
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In re Aqua Dots Prod. Liab. Litig., 270 F.R.D. 377 (N.D. Ill. 2010) District Court “The court begins its analysis with the superiority requirement [of F.R.C.P. 23(b)(3)] because it finds this issue dispositive for all of the proposed classes.” “At bottom, this is a suit to recover the purchase price of tainted Aqua Dots. Since the defendants will provide a refund-without needless judicial intervention, lawyer’s fees, or delay-to any purchaser who asks for one, there is no realistic sense in which putative class members would be better off coming to court.” © 2011 Winston & Strawn LLP
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In the Matter of Aqua Dots Prods. Liab. Litig., 2011 WL 3629723 (7th Cir. Aug. 17, 2011) Court of Appeals “Instead of departing from the text of Rule 23(b)(3), the district court should have relied on the text of Rule 23(a)(4), which says that a court may certify a class action only if ‘the representative parties will fairly and adequately protect the interests of the class.’ … A representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests.” © 2011 Winston & Strawn LLP
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Characteristics of a Successful Voluntary Refund Program
Refund program should be substantially equivalent to what putative class members could expect to recover through a class action suit. Refund program should be widely publicized and utilized. Refund program should be implemented as soon as possible after the circumstances arose that could have potentially led to a class action lawsuit.
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Possible Alternate Strategy – Facilitate Administrative Remedies
A defendant who is facing probable or certain liability should determine whether there is an administrative remedy in place, or whether there is the potential to coordinate with an agency to facilitate the creation of an out-of-court settlement program to save litigation costs.
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Lanzarone v. Guardsmark Holdings, Inc., 2006 WL 4393465 (C.D. Cal. 2006)
“A district court does not abuse its discretion in denying certification when existing administrative proceedings are superior to a class action.”
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Ostrof v. State Farm Mut. Auto Ins. Co., 200 F.R.D. 521 (D. Md. 2001) “It appears that for at least two years the Maryland Insurance Administration (MIA) has been examining the appropriateness of the use of computer programs by insurers to aid in the review of medical claims, an inquiry in which State Farm and others have participated,… Not only does the MIA have the authority to order individualized remedies if the circumstances warrant; it has apparently indicated that it will exercise that authority. But if that is so, it is clear that adding a class action overlay in federal court makes little sense.” © 2011 Winston & Strawn LLP
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Characteristics of a Superior Administrative Remedy
Class action litigation would achieve the same remedy afforded by administrative agency. Significant relief has been realized by many members of the putative class. Individuals are not barred from bringing suits on their own behalf.
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Concluding Thoughts
Consider all options. As these strategies are more likely to succeed in certain jurisdictions, consider whether removal to federal court and/or a transfer is possible and desirable. Keep us posted on your successes.
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Questions?
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Thank You.
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Contact Information
Neal Marder
Christian Dodd
Litigation Los Angeles 1 (213) 615-1728
[email protected]
Litigation Los Angeles 1 (213) 615-1717
[email protected]
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