Articles from November 2011

California Central District Judge James V. Selna has granted certification of a nationwide class alleging violations of California’s consumer-protection statutes in connection with prepaid telephone calling cards.  See Galvan v. KDI Distribution, Inc., No. 08-cv-0999 (C.D. Cal. Oct. 25, 2011) (order granting class certification motion) (available here).  The plaintiff alleges that the defendant misrepresented the total number of calling minutes consumers would receive with the purchase of the defendant’s prepaid calling cards.  Id. at 2.

The detailed and closely reasoned decision is notable in several respects, foremost the application of California law to the nationwide class.  See id. at 19-20.  The court reasoned that because California law is not in conflict with the laws of other states where KDI operates (at least as it pertains to the issues presented in this case), and KDI’s primary place of business is in California, California law would be most appropriate to apply to the class.  Id. at 20.  

The court also rejected the defendant’s argument that individualized showings of reliance precluded class certification by rendering individual issues of law and fact predominant.  See id. at 15.  The court thus reinforced the trend among trial and appellate courts to find a presumption of reliance as to absent class members in cases where, as here, the basis of the class’s claims is false advertising and misrepresentations made by the defendant, and the alleged misrepresentations are material.  

Finally, the court substantially credited the plaintiff’s proposed trial plan.  Id. at 17.  The plaintiff proposes to establish class-wide liability through a combination of documents already produced by the defendant, legal and economic expert testimony, and “limited individual inquiries” to establish damages and proper measures of restitution.  Id. 

The Ninth Circuit recently held that proof of the materiality of misrepresentations alleged in a securities fraud class action is not a prerequisite to class certification. Connecticut Retirement Plans and Trust Funds v. Amgen Inc., No. 09-56965, 2011 U.S. App. LEXIS 22540, *15-16 (9th Cir. Nov. 8, 2011) (citing, inter alia, Erica P. John Fund v. Halliburton, 131 S. Ct. 2179 (2011)) (available here). Rather, the court found that materiality is to be resolved during the post-certification “merits” phase, stating,  “[a]s for the element of materiality, the plaintiff must plausibly allege—but need not prove at this juncture—that the claimed misrepresentations were material. Proof of materiality . . . is a merits issue that abides the trial or motion for summary judgment.” Id. at *3.

The John Fund and Connecticut Retirement decisions are likely to have implications beyond their immediate application to securities cases. There is an increasing trend toward a presumption of reliance in consumer class actions, akin to the reliance presumption that has been adopted in securities class action jurisprudence since the landmark decision in Basic v. Levinson, 108 S. Ct. 978 (1988). Current consumer class action decisions closely resemble the case law leading to Basic v. Levinson. See generally Wolph v. Acer, 272 F.R.D. 477 (N.D. Cal. Mar. 25, 2011) (class-wide reliance presumed from showing that misrepresentation is material); Fitzpartick v. General Mills, No. 10-11064, 2011 U.S. App. LEXIS 6047 (11th Cir. Mar. 25, 2011) (same); Cole v. Asurion Corp., 267 F.R.D. 322 (C.D. Cal. 2010) (same). As the doctrine of presumed reliance in consumer class actions evolves and matures, therefore, it is reasonable to expect that courts will also adopt the view that proof of materiality is a post-certification, merits determination.

In another decision suggesting that reports of the death of class actions are greatly exaggerated, California’s Court of Appeal has affirmed a trial court order striking down an arbitration clause that included a class action waiver in Sanchez v. Valencia Holding Co., ___ Cal. App. 4th ___ (2011) (available here).

 Although the Court of Appeal upheld the trial court’s decision, it did so on different grounds, underscoring the continued vitality of California’s unconscionability doctrine.  In Sanchez, a consumer class action, the defendant car dealer moved to compel arbitration pursuant to an arbitration clause embedded in the sales agreement between the plaintiff and the defendant.  Slip op. at 1.  The arbitration clause included a class action waiver and a “poison pill” provision, whereby the entire arbitration clause would be held unenforceable if the class action waiver were found unenforceable.  Id. at 7.  The trial court determined that the class action waiver was unenforceable on the ground that a consumer is statutorily entitled to maintain a CLRA suit as a class action, pursuant to California Civil Code section 1781.  Id.  On that basis, the trial court invalidated the entire arbitration clause, consistent with the sales contract’s severance provision.  Id.  The Court of Appeal reached the same ultimate conclusion as the trial court—that the arbitration clause is unenforceable—but based its decision on the unconscionability doctrine, rather than on the sales contract’s severance provision.

The Court of Appeal noted that while the U.S. Supreme Court’s opinion in AT&T v. Concepcion decried the Discover Bank rule and its attendant unconscionability analysis with regard to class action waivers, the U.S. Supreme Court left untouched California’s general unconscionability doctrine, which may still be employed to invalidate arbitration clauses in their totality.  See id. at 11-12.  The court found Concepcion to be inapplicable to situations where an entire arbitration provision is at issue, rather than merely “a class action waiver or a judicially imposed procedure that conflicts with the arbitration provision and the purposes of the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1–16).”  Id. at 12.  

Amid calls for new legislation and regulation to address misconduct in the financial industry, a new study produced jointly by two business schools points to a solution that is already up and running: class actions.  Accounting professors from the Rutgers Business School and Emory University’s Goizueta Business School have completed a study which concludes that class actions are strong deterrents to the misrepresentation of corporate financial projections and quarterly results, and even stronger deterrents to securities fraud.  The study’s preliminary findings are at odds with the prevalent caricature of class actions as targeting trivial, technical violations and benefitting only plaintiffs’ lawyers.  Moreover, the Rutgers/Emory study’s findings stand in contrast to apparent misgivings on the part the United States Supreme Court’s conservative bloc about the social utility of class actions, exemplified in recent decisions such as Concepcion v. AT&T and Dukes v. Wal-Mart.

Among the Rutgers/Emory study’s specific findings is the conclusion that companies that have been sued in a class action alleging financial misconduct are significantly less likely to engage in the practice of “discretionary accrual,” i.e., the practice of reporting revenue for unconsummated sales transactions.  While the study concluded that the optimal enforcement scenario entails both public and private efforts, it also found that private enforcement and public enforcement (by the Securities and Exchange Commission) are roughly equal in their deterrent effects.  Thus, given recent reductions in tax revenue and government budgets, the Rutgers/Emory study underscores the importance of private class actions.

The Rutgers/Emory study is currently being circulated for peer review and is expected to be published in early 2012.