Articles from April 2011

Supreme Court Issues AT&T v. Concepcion Decision

The United States Supreme Court today issued a 5-4 opinion reversing a Ninth Circuit decision and holding that AT&T may enforce a contract provision that requires customers to arbitrate their disputes individually, rather than class-wide.  Some have predicted that such a ruling could effectively end consumer class actions of this type.  In so ruling, the Supreme Court held that the Federal Arbitration Act (FAA) preempts California’s extensively articulated doctrine of unconscionable contracts, which had operated to invalidate the manifestly one-sided provision by which AT&T customers were required to arbitrate disputes and were prohibited from arbitrating claims as class actions (a de facto class action ban).  Consequently, since such provisions are not in fact “negotiated,” but rather are drafted by the employers and retailers who have a virtual monopoly on bargaining power, this decision is expected to motivate employers and retailers to unilaterally insert class action prohibitions in employment and consumer agreements under the guise of an arbitration clause.

The AT&T v. Concepcion majority opinion was written by Justice Antonin Scalia, often celebrated in Federalist Society circles as an advocate for state autonomy.  “States cannot require a procedure that is inconsistent with the FAA,” Scalia wrote, drawing on his strict-constructionist persona, “even if it is desirable for unrelated reasons.”  In dissent, Justice Stephen Breyer ominously suggested the implications of today’s AT&T v. Concepcion ruling: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?”

Being that the Supreme Court is the judicial tier of last resort, this battle is now over in the courts.  Among the options for those wishing to ensure the continuation of class actions is amendment of the FAA to accommodate state policy choices.  However, it is unclear whether there is the political motivation in either the Congress or executive branch for such an undertaking.

The full opinion is available here.

Fitzpatrick v. General Mills: Applying the Presumption of Reliance in Consumer Class Actions to Affirmative Misrepresentations

In Fitzpatrick v. General Mills, No. 10-11064, 2011 U.S. App. LEXIS 6047 (11th Cir. 2011) (available here), the Eleventh Circuit applied the presumption of reliance among absent class members in a consumer class action case alleging affirmative misrepresentations , similar to the standard used in consumer class actions alleging material omissions. The presumption of reliance where material omissions are alleged is increasingly uncontroversial. See e.g., Cole v. Asurion Corp., 267 F.R.D. 322 (C.D. Cal. 2010) granting certification on omission-based liability theory); Wolin v. Jaguar Land Rover North America, LLC, 617 F.3d 1168 (9th Cir. 2010) (reversing denial of certification where district court abused discretion; common questions predominated as to defendant’s duty to disclose under consumer protection statutes). And while Fitzpatrick formally represents an application of Florida’s consumer protection statute, its broader significance could be in confirming that the presumption of reliance has the same utility in affirmative misrepresentation consumer class actions as in those alleging omissions.

In Fitzpatrick, the district court certified a class alleging that General Mills had materially misrepresented the digestive benefits of its YoPlus yogurt, sold under the popular Yoplait brand. Fitzpatrick, 10-11064 at *2-*3. Not only did the Court of Appeals reject the defendant’s contention on appeal that the district court had abused its discretion in certifying the class because individual issues predominate, the unanimous three-judge panel praised the certification ruling as “a scholarly work reflecting careful attention to the requirements of Federal Rule of Civil Procedure 23, existing precedent and the factual background of this matter.” Id. at *7.

The Eleventh Circuit’s lone quibble with the district court’s certification ruling was that it embodied a class definition that “seems to conflict with its earlier sound analysis.” Id. at *9-*10. Specifically, in limiting the class to those who purchased YoPlus to obtain its claimed digestive health benefit, the federal appellate court noted that the definition “takes into account individual reliance on the digestive health claims,” thereby contradicting the controlling presumed reliance standard. Id. at *10. Thus, although the opinion formally vacated the district court’s certification order, the case was remanded with instructions that the district court issue a certification order that properly reflects its own standard of presumed reliance. Id.

Securities class actions saw the first application of presumption of reliance as the fraud on the market theory to a narrow subset of cases. Now the fraud on the market version of presumed reliance applies virtually without exception in securities class actions. A similar common law evolution is evident in consumer class actions, as Fitzpatrick suggests that the same pragmatic logic by which the presumptions of reliance attach in consumer class actions alleging material omissions is equally applicable where affirmative misrepresentations are alleged.

Bateman v. American Multi-Cinema, Inc.: Ninth Circuit Deals Blow to “Annihilating” Penalties Class Actions Defense

Class action defendants frequently argue, under the class certification superiority rubric, that potentially annihilating penalties means class treatment is not superior to individual litigation, and thereby precludes certification. However, under Bateman v. American Multi-Cinema, Inc., 623 F.3d 708 (9th Cir. 2010) (available here), the Ninth Circuit has held that Rule 23 does not permit the trial court to consider whether the defendant’s potential liability would be disproportionate to the class members’ actual damages. The three-judge panel reversed the denial of class certification by former Central District Judge, the late Florence-Marie Cooper, under the Fair Credit Reporting Act (FCRA), 15 U.S.C. §§ 1681 et seq. Judge Cooper’s certification denial had focused on the purported lack of superiority because “the magnitude of Defendant’s statutory liability is enormous and completely out of proportion to any harm suffered by Plaintiff or potential class members.” Bateman v. American Multi-Cinema, Inc., 252 F.R.D. 647, 651 (C.D. Cal. 2008) (available here).

In reversing the denial of certification, though, Bateman declined to follow a number of earlier cases involving the Truth-in-Lending Act (TILA), 15 U.S.C. §§1601 et seq., in which courts considered annihilating penalties as bearing on the superiority criterion, and on that basis denied class certification. For instance, in the much-cited case of Ratner v. Chemical Bank New York Trust Co., 54 F.R.D. 412 (S.D.N.Y.1972), District Judge Frankel denied class certification in a TILA claim because the potential $13 million award “would be a horrendous, possibly annihilating punishment, unrelated to any damage to the purported class or to any benefit to defendant, for what is at most a technical and debatable violation of the Truth in Lending Act.” Id. at 422.

Under Bateman, the law of the Ninth Circuit is that “the Rule 23(b)(3) superiority analysis must be consistent with the congressional intent in enacting a particular statutory damages provision.” Bateman, 623 F.3d at 716. After acknowledging the different holding in Ratner, the Bateman panel explained “[t]here is no language in the statute, nor any indication in the legislative history, that Congress provided for judicial discretion to depart from the $ 100 to $ 1000 range where a district judge finds that damages are disproportionate to harm. Further, we cannot surmise a principled basis for determining when damages are and are not ‘proportionate’ to actual harm. Indeed, one might plausibly argue that a $ 1000 award, or even a $ 100 award, for a single violation of FACTA, without any allegation of harm, is not proportionate. But the plain text of the statute makes absolutely clear that, in Congress’s judgment, the $ 100 to $ 1000 range is proportionate and appropriately compensates the consumer.” Id. at 719.

Other circuit courts, as well as district courts in other circuits, have similarly held that the Ratner annihilating penalties analysis to be improper. See, e.g., Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. 2006) (holding that problem of annihilating penalties should not be addressed at the class-certification stage).

Long v. Tommy Hilfiger, Inc.: Standard for Willful Conduct Objective, Not Subjective

In addition to generating caselaw bearing on whether large class action damages constitute “annihilating” penalties that render individual actions superior to class treatment, the Fair and Accurate Credit Transactions Act (FACTA) also defines the common term willfulness, a measure of conduct with considerable application beyond FACTA consumer class actions, or wage-and-hour class actions.

In California, for instance, the waiting-time penalties that are often the largest portion of damages where relatively small per-violation amounts are alleged (such as with the miscalculation of overtime pay rates) are triggered only if the underlying conduct is deemed willful. While not a wage-and-hour decision per se, Long v. Tommy Hilfiger, Inc., No. 09-1701 (W.D. Pa. Feb. 11, 2011) (available here) adds weight to the argument that analysis of willful conduct ought to be under a objective standard, as opposed to a subjective standard that will often provide incentives for employers and retailers to be deliberately uninformed as part of making out a defense to willfulness. See Cal. Lab. Code § 203(a) (“If an employer willfully fails to pay . . . any wages of an employee who is discharged or who quits, the wages of the employee shall continue as a penalty frwillfom the due date thereof at the same rate until paid or until an action therefor is commenced; but the wages shall not continue for more than 30 days.”) (emphasis added). Under an objective standard, any discovery of or analysis concerning a defendant’s subjective beliefs is obviated, in favor of an inquiry as to the objective reasonableness of the defendant’s conduct.

In Long, the district court took up whether the defendant had violated the FACTA requirement that credit card receipts not show a credit card’s expiration date by including the month, but not year, or expiration on credit card receipts. Under the premise that “expiration date” within FACTA’s meaning and intent requires both a month and year, the court held that the defendant did not violate FACTA. It was the court’s alternative reasoning from which the broader holding concerning willfulness arose. The court concluded the defendant’s understanding of the statute was objectively reasonable in the absence of any judicial guidance, so even if printing only the month of expiration had been a violation of the expiration date prohibition, it would not have been a willful violation. As such, FACTA statutory penalties, which require willful conduct, would not be triggered. The Long court relied on the willfulness analysis in Shlahtichman v. 1-800 Contacts, 615 F.3d 794 (7th Cir. 2010), and its holding applying an objective standard to willfulness analysis.

Accordingly, despite being a ruling helpful to companies, the objective standard for assessing willful conduct could, in the long run, yield considerably greater pro-plaintiff benefits, with any class seeking California’s Section 203 waiting-time penalties being one obvious beneficiary.