Posts belonging to Category Caselaw Developments

With the proliferation of expensive cell phones, customers regularly buy insurance that will pay for a replacement phone in the event of loss, theft, or destruction, which typically includes a deductable. In Cole v. Asurion Corp., No. 06-6649 (C.D. Cal. filed Oct. 18, 2006), the plaintiff alleged that, as a result of a change in her cell phone insurance carrier, her deductable suddenly increased from $35 to $110. Her complaint included claims under California’s consumer protection statutes as well as common law claims for misrepresentation, breach of contract, and unjust enrichment. Significantly, in addition to alleging affirmative misrepresentations, the plaintiff also alleged material omissions which, if established, give rise to a class-wide presumption of reliance, obviating the most common and potent argument against class certification: that common questions of law or fact do not predominate.

Defendants made the familiar argument that variations in particular representations made to consumers precluded class certification altogether. Rejecting the defendants’ argument, the court granted certification on the omission-based theory of liability. Cole v. Asurion Corporation, 267 F.R.D. 322 (C.D. Cal. 2010). In so ruling, Central District Judge Phillip S. Gutierrez reinforced the trend of distinguishing misrepresentation- and omission-based theories of class-wide liability, and enforcing the presumption of reliance that attaches to material omissions. See, e.g., 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).

Despite a compelling dissent by Justice Victoria Chaney, the California Supreme Court has decided not to grant the Petition for Review in the closely watched Villacres v. ABM Indus., Inc., 117 Cal. Rptr. 3d 398 (Cal. Ct. App. 2010). In Villacres, a divided Second Appellate District panel held that res judicata barred the plaintiff’s claims under the Private Attorneys General Act of 2004 (PAGA), CAL. LAB. CODE §§ 2698-99.5, even though the settlement agreement and release in the preceding class action (of which the plaintiff was a class member) did not list PAGA claims among those released. In fact, no PAGA claims were ever pleaded or litigated in the previous class action. The Villacres majority reasoned that what “could have” been pleaded and litigated, or “could have” been settled and released controls over the actual settled and released claims that parties list in their settlement agreements. See Villacres at 409.

The Supreme Court’s denial of review was thus met with some surprise, particularly after the Court had extended its deliberations (see Villacres v. ABM Indus., Inc., No. S188659, 2011 Cal. LEXIS 1301 (Cal. Jan. 24, 2011)) and the decision continued to attract considerable coverage and interest from journalists, bloggers, and non-parties. Capturing the broad sentiment, the Villacres decision was characterized as “unprecedented” and a “threat[]” to “all class action settlement[s].” Amicus letter from Michael D. Singer, of Cohelan Khoury & Singer, to the California Supreme Court, on behalf of the California Employment Lawyers Association (CELA) (Jan. 4, 2011) (available here).

Given the infinitely elastic “could have” standard adopted by the Villacres majority, it is inevitable that another employer that has settled, say, a back overtime claim based on a theory of misclassification will posit that it cannot owe PAGA civil penalties for unreimbursed business expenses because such claims certainly “could have” been a part of the case that settled the misclassification/overtime claims. However, that same enticement might operate to cause the Supreme Court to choose the right case, at the right time, to articulate the rule of law advocated by Justice Chaney: that it is the claims listed in parties’ operative settlement agreements—not what might be conceived in an ex post “could have” exercise—that determines what has or has not been released in a class action settlement.

The Villacres petition was denied; formally, its status is “case closed.” However, the scope and definition of class action releases remains very much an open issue. Plaintiff practitioners would be well-advised to craft releases that clearly delimit the boundaries of the release and avoid any language similar to the “could have been” clause in Villacres.

Now, nearly two-and-a-half years after the September 2008 collapse of Lehman Brothers (the emotional, if not technical, start of the “Great Recession”), we are seeing the resolution of litigation related to the phenomenon that most agree was the tripwire to the economy’s sudden fall: sub-prime mortgages and their too-good-to-be true consumer inducements.

One notable settlement was recently reached in the case of In re: Wachovia Corp. “Pick-a-Payment” Mortgage Marketing and Sales Practices Litigation, No. 5:09-md-02015-JF (C.D. Cal. filed Feb. 13, 2009). A copy of the Settlement Agreement is available here. The Wachovia Corp. “Pick-a-Payment” class had alleged that Wachovia (itself a casualty of the economic crisis and now owned by Wells Fargo) deceived customers by failing to disclose that borrowers could face negative amortization of their payment option mortgages by choosing to make minimum payments in amounts less than the interest accrued during the payment period. The remaining interest would then be capitalized, or added to the loan principle, which would itself accrue interest. The tantalizingly low payments of these “Pick-a-Payment” loans were a common feature of home mortgage loans that, in the expectation of a perpetual refinancing market, eventually entailed enormous balloon payments once the early-phase, unnaturally low payments expired. Apart from deceiving consumers, this and other negative amortization schemes directly contributed to the mortgage defaults that triggered the collapse of mortgage-backed securities, a wholly separate source of litigation. In a related matter, Wells Fargo entered into individual settlement agreements with the Attorneys General of at least ten states, including California, to provide mortgage modification and restitution to customers who obtained Pick-a-Payment loans from Wachovia and World Savings Bank.

The immediate significance of the Pick-a-Payment settlements is three-fold. First, the settlements are notable in their magnitude: the In re: Wachovia Corp. settlement pool is over $50 million, exclusive of attorneys’ fees and administrative costs, and the Wells Fargo settlement with the State of California includes over $2 billion in loan modifications. In addition, the California settlement obligates Wells Fargo to make direct restitutionary cash payments totaling $32 million to over 12,000 California borrowers who lost their homes through foreclosure on Pick-a-Payment loans. Second, the Pick-a-Payment settlements underscore the continuing relevance of government entities’ prosecution of consumer-based civil claims. Then-Attorney General, now governor, Jerry Brown is understood to have been personally invested in the litigation, a pro-consumer zeal that will likely carry over into his newest gubernatorial administration. (Similarly, in the wage-and-hour realm, President Barack Obama has substantially expanded the federal Department of Labor’s enforcement of misclassification violations, in which employers attempt to elude overtime obligations by titling employees as “managers” or “administrative” but without satisfying the requisite criteria for an overtime exemption.) Finally, with the term “class action” having unfortunately acquired an unearned negative connotation among some due to ongoing corporate campaigns, the Pick-a-Payment settlements serve as a reminder that only class actions are capable of the sort of massive remedial action that was called for here, which directly benefited victims of deceptive loan practices who had been put out of their homes.

It cannot be disputed that the eventual Dukes decision will remake the rules for federal district courts’ consideration of motions for class certification. And in light of the state courts’ practice of regularly consulting Rule 23 jurisprudence, Dukes will likely be a landmark class certification ruling from the Roberts Court. The Dukes decision is also likely to remake the strict divide between class certification analysis and merits analysis. Specifically, those who litigate class actions in federal court invariably invoke and confront the maxim set forth in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), that, in ruling on a motion for class certification, trial courts must only determine whether the requisite class certification elements (numerosity, predominance, and so forth) have been satisfied, not whether the class is likely to prevail on the merits. Plaintiffs’ counsel frequently underscore the holding in Eisen with citation to Blackie v. Barack, 524 F.2d. 891 (9th Cir.) (1975), for the proposition that the allegations in the complaint must be presumed true throughout the class certification analysis. However, in Dukes, the Ninth Circuit noted a tension between Eisen and Blackie and the largely unarticulated mandate in General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147 (1982), requiring that trial courts conduct a “rigorous analysis” of each Rule 23 element.

While the Ninth Circuit’s opinion in Dukes purported its emphasis on the “rigorous analysis” standard to be a legal non-event, without circuit split implications, its rejection of the Blackie rule requiring that the operative class complaint’s allegations be presumed true has caused many observers to speculate that the Supreme Court will build on that and fashion a new rule for class certification jurisprudence interpreting the Falcon “rigorous analysis” requirement to entail a substantially greater consideration of the merits than that to which class action practitioners have grown accustomed over the first forty-plus years of Rule 23 jurisprudence.

Accordingly, whether the future of trial courts’ consideration of class certification motions will involve a more probing assessment of the merits is undoubtedly one of, if not the, most watched issues in connection with the Dukes case.