Articles from June 2012

On a day of surprises at the U.S. Supreme Court, it was a terse ruling on Article III standing — the gateway that determines which plaintiffs may and may not be in federal court — that could have greater consequences than the widely-covered healthcare ruling.  Because many class actions that were formerly resolved in state courts are now channeled into federal courts by the Class Action Fairness Act, advocates for consumers and workers feared that the Court took up Edwards v. First American Corp. in order to craft an onerous Article III “actual injury” standard that would lead to a rash of dismissals in these cases, without further recourse for the plaintiffs.  A 5-4 majority opinion imposing such a rule would be consistent with recent decisions increasing the burden on plaintiffs in federal court.

The at-issue statute in Edwards was the Real Estate Settlement Procedures Act (RESPA), which prohibits “kickbacks” and other quid pro quo arrangements between title companies and other entities in connection with real estate closings.  See Edwards v. First Am. Corp., 610 F.3d 514 (9th Cir. 2010) (available here).  Under RESPA, a party to a real estate transaction is entitled to relief when such an arrangement occurs, even if the party suffers no financial loss or diminution of services as a result of the RESPA violation.  Denise Edwards did not allege financial or other loss from the kickback arrangement that First American, her title company, engaged in, but she nonetheless sued First American under RESPA, on behalf of herself and all others similarly situated.  See id. at 516-17.  The defendant argued that Edwards lacked standing to pursue a claim because she did not suffer any injury.  Id.  The Ninth Circuit rejected this argument, holding that Edwards had standing to sue First American because RESPA provided her a statutory right to do so.  Id. at 518.

What followed was a two-year legal odyssey: the granting of defendant’s writ of certiorari, months of anticipation, oral arguments, copious briefing as to a Ninth Circuit decision that many believed would be reversed, all culminating in the Supreme Court’s issuance of a two-sentence opinion, “The writ of certiorari is dismissed as improvidently granted.  It is so ordered.”  First Amer. v. Edwards, 567 U. S. ____ (2012) (available here).  With that, the appeal in Edwards was over, with a swiftness and simplicity that belied the concern the case had engendered.

The U.S. Supreme Court has decided to review a Third Circuit decision bearing on a key element of class certification jurisprudence. See Behrend v. Comcast Corp., 655 F.3d 182 (3d Cir. 2011), cert. granted, 80 U.S.L.W. 3442 (U.S. June 25, 2012) (No. 11-864) (available here).

In its petition, Comcast asked the Court to address “whether a district court may certify a class action without resolving ‘merits arguments’ that bear on Rule 23’s prerequisites for certification, including whether purportedly common issues predominate over individual ones under Rule 23(b)(3).” Petition for Writ of Certiorari at i, Comcast Corp. v. Behrend, __ S. Ct. __ (2012) (No. 11-864), 2012 WL 105558 (available here). This seemed a ripe issue for the Court to take up, given the tension between the traditional doctrinal separation between class certification and “merits” analysis and recent decisions mandating “rigorous analysis” that seemingly implicates a merits-based inquiry. Compare, e.g., Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 178 (1974) (“In determining whether to certify a class action, ‘the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.’”) with Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011) (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982) (district courts must engage in “rigorous analysis” to ensure that the “party seeking class certification [can] affirmatively demonstrate his compliance” with Rule 23)).

However, in agreeing to review the case, the Supreme Court took the unusual step of reframing the core issue, narrowing the scope of its review to: “Whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.” (emphasis added). This is likely a signal that the Court plans to resolve the debate sparked by its dicta in Dukes, where, in response to the conclusion of California Northern District Court Judge Jenkens that a full Daubert analysis is not appropriate at the certification stage, the Court stated: “We doubt that is so.” 131 S. Ct. 2541, 2554.

In an unusual procedural turn and exemplar of the virtue of persistence, this appeal was “relisted” seven times. Thus, on six prior occasions, the certiorari petition was scheduled for a vote, and each time, the vote was deferred and listed for a subsequent conference. The repeated delays likely resulted from proponents’ difficulty in securing the four votes necessary to grant a certiorari petition, which in turn could suggest that those proponents will have a similarly difficult time finding the five-vote majority necessary to promulgate their favored doctrine as to the proper expert analysis to be undertaken by courts attendant to Rule 23 class certification analysis.

Judge Claudia Wilken, of California’s Northern District, has certified a class of consumers alleging that Experian, one of the leading credit-reporting agencies, improperly disclosed their credit reports to third parties.  See Holman v. Experian, Inc., No. 11-cv-00180 (N.D. Cal. Apr. 27, 2012) (Order Granting Plaintiffs Motion for Class Certification) (available here).  The plaintiffs contend that Experian disclosed class members’ credit reports to Finex Group, LLC (“Finex”), in violation of the Fair Credit Reporting Act (FCRA).  See Order at 1.  Plaintiffs’ claims arose from disparate experiences in which their cars were towed.  Finex, a company specializing in the collection of towing-related obligations, was then contracted to collect the resulting debts, and Experian provided Finex with the plaintiffs’ credit reports, allegedly without ascertaining whether Finex had a permissible purpose.  See id. at 2-3.

Experian attacked plaintiffs’ certification motion on several fronts, first arguing that the class definition, encompassing all consumers whose reports were provided to Finex, was overly broad, since some of those records would necessarily have been furnished in compliance with FCRA.  Id. at 15-16.  Although Judge Wilken agreed that the proposed class definition was overbroad, rather than denying certification on that ground, she followed the abundant precedent holding that modifications to class definitions are within a district court’s permissible discretion in ruling on a class certification motion, and modified the class definition accordingly.  See id. at 17-18.

Experian also argued that plaintiffs’ counsel should not be appointed counsel for the class, since they invaded class members’ privacy by not seeking the court’s intervention and authority before obtaining the class list from Finex (the records custodian).  The court rejected this argument, with reference to Pioneer Electronics, Inc. v. Super. Ct., 40 Cal. 4th 360 (2007), a leading California case concerning prospective class member contact information.  Order at 34-35.  Judge Wilken made it clear that Pioneer Electronics does not require plaintiffs’ counsel to affirmatively ask the court’s permission to receive the class records, since Finex provided the information voluntarily and without objection.  She went on to note, “Experian provides no case law that supports the proposition that a recipient of confidential information can be held liable for the supplier’s improper disclosure.”  Order at 35.

The numerosity, typicality, adequacy and superiority requirements were fairly easily satisfied by plaintiffs.  Id. at 24-32.  As to commonality, Experian offered the relatively weak argument that, having issued a sequence of several different directives during the class period, the inquiry into the reasonableness of its FCRA compliance procedures would be fragmented according to those different directives.  Id. at 19.  Thus, no determination could be made as to the class period as a whole.  Id.  However, during oral argument, Experian’s counsel conceded that this impediment could be overcome by dividing the class into subclasses according to time period.  Id.  As such, Judge Wilken found that the plaintiffs satisfied the commonality element, and the class was certified.  Id. at 24, 35.  The action now moves to the merits phase.

An Alabama federal court has certified a class of investors who allege that they were defrauded by the defendant’s misleading statements regarding the performance of a real estate portfolio.  See Local 703 v. Regions Fin. Corp., No. 10-cv-02847 (N.D. Ala. June 14, 2012) (Memorandum Opinion re certification) (available here).  The plaintiffs claim that the defendant artificially inflated the value of its real estate holdings by misrepresenting tens of millions of dollars in non-accrual loans.  Memorandum Opinion at 21.  The at-issue stock was trading at $23.22 at the beginning of the class period, but plummeted to $4.60 per share by the end of the class period.  Id. at 2. 

Defendant Regions mounted a strong challenge to Rule 23’s “typicality” requirement, arguing that the named plaintiffs did not have claims typical of the rest of the class, since they actually benefited from the alleged fraud by holding some shares for only a short period and then selling them at a profit.  Id. at 8-9.  However, the court found that, since the named plaintiffs did not divest themselves of all holdings during the class period, the typicality requirement was met, notwithstanding plaintiffs’ profits.  Id. at 9.

As to the predominance requirement, Regions argued (1) that plaintiffs failed to establish a presumption of class-wide reliance based on a “fraud-on-the-market” theory, and (2) even if plaintiffs had established such a presumption, Regions rebutted it.  Id. at 19-20.  The defendant reasoned that, since plaintiffs had not proven a link between defendant’s alleged misrepresentations and the drop in stock price, there could be no presumption of reliance.  In a sprawling analysis, Judge Inge Prytz Johnson found loss causation to be a trial issue, agreeing with the plaintiffs and numerous other courts that it was “not a relevant consideration for a court at this juncture.”  Id. at 34.  In so ruling, the court relied considerably on Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2185 (2011).  Judge Johnson concluded that plaintiffs had, in fact, established the presumption of reliance, and that defendants failed to rebut it.  Memorandum Opinion at 31-33, 38-39.  She consequently granted plaintiffs’ certification motion, finding all of the class action prerequisites to be satisfied. The certified action now proceeds to the merits phase.