New Drug Law in Canada

With a tip of the cap to our old friend, Peter Pliszka, north of border: Earlier this month, the so-called Protecting Canadians from Unsafe Drugs Act (Vanessa's Law) received royal assent and became law in Canada. This new legislation on paper was intended to protect Canadians from the potential risks related to drugs and medical devices by substantially increasing Health Canada's pre- and post-market powers over industry stakeholders, and changing the consequences for violating the Food and Drugs Act and its regulations.

Peter suggests that Vanessa's Law introduces the most significant amendments to the Food and Drugs Act in 50 years, and represents in some ways a new chapter in Canadian drug and medical device regulatory enforcement.

Peter notes that the new powers granted to Health Canada include:

• The power to order any person to provide information related to a drug or medical device where Health Canada believes that the product may present a serious risk of injury to human health;
• The power to order a manufacturer to conduct an assessment of a drug or medical device and to provide Health Canada with the results;
• The power to order a manufacturer to conduct additional tests or studies, or monitor experience, in relation to a drug or medical device for the purpose of obtaining additional information about the product's effects on health or safety, and to provide Health Canada with the results;
• The power to order a manufacturer to modify the label of a drug or medical device or to replace its packaging, where Health Canada believes that doing so is necessary to prevent injury to health; and
• The power to order any person who sells a drug or medical device to recall the product where Health Canada believes that a drug presents a serious risk of injury to health.

It appears that new regulations may be coming down the pike as well, on issues such as clinical trials information and product label issues outside of Canada.

Mouthwash Class Action Washed Out

A federal judge earlier this month granted defendant's motion to dismiss a putative class action lawsuit accusing it of using misleading labeling on its market mouthwash.  See Suzanna Bowling v. Johnson & Johnson et al., No. 1:14-cv-03727 (S.D.N.Y., 11/4/14).

The issue here was preemption.  Plaintiff Bowling filed this action on behalf of herself and others similarly situated, alleging that the defendant violated (1) numerous state statutes, as well as (2) the Magnuson-Moss Warranty Act ("MMWA"), when it sold Listerine Total Care ("LTC"), a line of
mouthwashes. Defendant moved to dismiss on the grounds that the state law claims were preempted by the Food Drug and Cosmetics Act ("FDCA"). (Put the MMWA issue aside for today.)

Plaintiffs alleged that purported claims that the mouthwash can help with tooth enamel issues were false. But FDA had trod on this ground in "monographs" that set out labeling regulations for over-the-counter ("OTC") dental hygiene products.  First, in 1980, the FDA published a proposed
monograph ("1980 Monograph"), which found, inter alia, that "[t]he deposition of fluoride in dental enamel has been shown to increase resistance to enamel solubility and therefore dental decay" - or in plain English, flouride is good for preserving enamel. Second, in 1995, the FDA published a final monograph ("1995 Monograph"), which permits manufacturers of OTC drugs containing sodium
fluoride (such as LTC) to market the product as "aid[ing] the prevention of dental .. . decay,"'  along with "other truthful and nonmisleading statements [further] describing [this] use."  In other words, pursuant to the 1995 Monograph, manufacturers of OTC drugs containing sodium fluoride are allowed (1) to represent that such drugs prevent tooth decay and (2) to provide further labeling to explain how decay is prevented.  Furthermore, on multiple occasions, the FDA has sent letters to manufacturers of OTC drugs containing sodium fluoride to clarify the parameters of the Monographs.  In each of these letters, the FDA has objected to certain labeling practices - for example, certain representation that sodium fluoride "fights plaque"- but it has expressed no concern about the label "Restores Enamel."

Defendant moved to dismiss. In the context of OTC drugs, the FDCA expressly preempts state law labeling requirements that are "different from," "addition[ al] to," or "otherwise not identical with" federal labeling requirements. Under this standard, said the court, preemption is certainly appropriate when a state law prohibits labeling that is permitted under federal law. But it is also appropriate when a state law prohibits labeling that is not prohibited under federal law. The standard, in other words, is not only whether a state law actively undermines federal law. It is whether state law diverges from federal law at all.

That means, found the court, that plaintiffs would need to plead facts suggesting that the FDA has
affirmatively prohibited the challenged label language. Otherwise, plaintiffs' state law causes of action would be, in effect, imposing a labeling requirement that is "not identical with" labeling requirements under federal law. "Plaintiffs cannot meet this burden." If the FDA had prohibited the
"Restores Enamel" kind of label, there would obviously have been a regulation saying so. But there was no such regulation. As it stands, observed the court, the FDA has issued a monograph directly on point but declined to indicate either in the monograph itself or in advisory interpretations of the monograph that a phrase like "Restores Enamel" is misleading. If successful, this litigation would thus do exactly what Congress sought to forbid: using state law causes of action to bootstrap labeling requirements that are "not identical with" federal regulation.

Motion granted, 

Federal Court Decertifies "Natural" Damages Class Action- Naturally

A federal court last week ordered decertification of a damages class action challenging “all natural” fruit labels, due to deficiencies with the the plaintiffs' damages model. See Brazil v. Dole Packaged Foods, LLC,  No. 12-1831 (N.D. Cal., 11/6/14).

Our loyal readers know we have posted on Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), and its potential impact on proposed damages class actions. Here, plaintiff alleged that 10 products, three he purchased and seven that were "similar", had labels that were false and misleading, especially with regard to their use of the term "natural," because all ten products contain ascorbic acid (commonly known as Vitamin C) and citric acid, both allegedly synthetic ingredients.

The court granted in part and denied in part the plaintiff's Motion for Class Certification on May 30, 2014. With respect to the damages class, Brazil's damages expert, Dr. Oral Capps, had advanced three models for measuring the alleged price premium attributable to Dole's use of the "All Natural" label statements. Of those three, the Court originally accepted only the model based on econometric or regression analysis. The Court concluded that the Regression Model, as originally presented to the Court at the time, provided a means of showing damages on a class-wide basis through common proof, thus satisfying the Rule 23(b)(3) requirement that common issues predominate over individual ones.  In reaching this conclusion, the Court rejected Dole's argument that class certification should be denied because Dr. Capps had not yet run his full regressions.

On August 21, 2014, Dole filed a Motion to Decertify.  Readers know that the standard used by the courts in reviewing a motion to decertify is the same as the standard when it considered plaintiffs' certification motions. E.g,, Ries v. Ariz. Beverages USA LLC, 2013 WL 1287416 , at *3 (N.D. Cal. Mar. 28, 2013).  On a motion for decertification, the burden remains on the plaintiffs to demonstrate that the requirements of Rules 23(a) and (b) are met.. Id . (quoting Marlo v. United Parcel Serv., Inc., 639 F.3d 942 , 947 (9th Cir. 2011)); see also Negrete v. Allianz Life Ins. Co. of N. Am., 287 F.R.D. 590 , 598 n.1 (C.D. Cal. 2012).

In its Motion to Decertify, Dole made two chief contentions. First, Dole argued that the damages class certified under Rule 23(b)(3) should be decertified because Dr. Capps' Regression Model was fundamentally flawed, rendering it incapable of measuring only those damages attributable to Dole's alleged misbranding. Second, Dole contends that the damages class, as well as the injunction class certified under Rule 23(b)(2) , should be decertified because neither is ascertainable.  Let's focus on the former. 

To satisfy the Rule 23(b)(3) predominance requirement, plaintiff needed to present a damages model that was consistent with his liability case. Comcast, 133 S. Ct. at 1433. More specifically, the regression model purporting to serve as evidence of damages in this class action must measure only those damages attributable to Dole's alleged conduct. Specifically, the type of damages that Brazil's model sought to prove was restitution, a remedy whose purpose is to restore the status quo by returning to the plaintiff funds in which he or she has an ownership interest. Kor. Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134 , 1149 , 131 Cal. Rptr. 2d 29, 63 P.3d 937 (2003). The UCL, FAL, and CLRA - statutes relied on by plaintiff -- authorize California trial courts to grant restitution to private litigants. See Colgan v. Leatherman Tool Grp., Inc., 135 Cal. App. 4th 663 , 694, 38 Cal. Rptr. 3d 36 (2006). The proper measure of restitution in a mislabeling case, said the court, is the amount necessary to compensate the purchaser for the difference between a product as labeled and the product as received. Restitution is then determined by taking the difference between the market price actually paid by consumers and the true market price that reflects the impact of the unlawful, unfair, or fraudulent business practices. See Werdebaugh v. Blue Diamond Growers, 2014 WL 2191901 , at *22 (N.D. Cal. May 23, 2014). Accordingly, Brazil had to present a damages methodology that can accurately determine the price premium attributable to Dole's use of the "All Natural Fruit" label statements.

Right out of the box, plaintiff had trouble with the methodology, which originally compared data on identical Dole products: the product before the label statement was introduced, and the same product after its label included the alleged misrepresentation.  But as it turned out, discovery revealed that the labels for nine of the ten products in the certified class did not actually change during the class period. So Dr. Capps had to change his methodology as a result, going to a type of regression methodology known as "hedonic price analysis" or "hedonic regression."  

Then, Dole identified six flaws with the new method [the "Model"]: (1) the Court approved a "sales" regression but Dr. Capps performed a "price" regression; (2) the Model confused "brand" and "label"; (3) the Model improperly used retail-level data; (4) the Model did not control for other variables; (5) the Model had data errors; and (6) the Model failed under Comcast. The Court relied on the latter three arguments to find that Dr. Capps' Model did not sufficiently isolate the price impact of Dole's use of the "All Natural Fruit" labeling statements, and therefore failed under Comcast to adequately tie damages to Dole's supposed misconduct.

Plaintiffs had represented that the Model could control for all other factors that may affect the price of Dole's fruit cups, such as Dole's advertising expenditures, the prices of competing and complementary products, the disposable income of consumers, and population.  But the court agreed with Dole, for example, that Brazil failed to show how the Model controlled for other variables affecting price. With respect to advertising, Dr. Capps admitted that he did not control for this variable -- i.e., whether any price premium on the challenged products was due to Dole's "All Natural Fruit" labeling claim rather than to its advertising expenditures. Moreover, many of Dr. Capps' assumptions about the competing products upon which his model relies were either wrong or untested. For example, it was not shown that Del Monte, Dole's chief competitor, actually made the "All Natural" labeling claim on its products. This methodology cannot survive Comcast, said the court. The whole stated objective of Dr. Capps' model was to isolate the price premium supposedly attributable to Dole's "All Natural Fruit" label claim. So if the model was unsure whether the non-Dole products actually made an "All Natural" labeling claim, then how could a court know whether the price premium the model generates is based on Dole's labeling claim rather than on some other factor? "Put simply, it cannot."   

The Model also overlooked differences in how the products are packaged. Consumers might be willing to pay a premium for fruit products packaged in a certain way. Many of the challenged products, such as the "Pineapple Tidbits," come in "four packs," or four, 4-oz. cups packaged together. But Dr. Capps' model treated a "four pack" as equal to a 16-oz can. There is no control for packaging convenience in the model, even though consumers might well pay a premium for the convenience of four individual fruit cups.

Thus, plaintiff had not met his burden to show that the model he proposed was capable of controlling for all other factors and isolating the price premium, if any, attributable to Dole's "All Natural Fruit" label only. As such, Comcast required the court to find that the Rule 23(b)(3) predominance requirement had not been satisfied.

Damages class decertified.

 (Court rejects ascertainability challenges to injunctive relief class. More on that another day.)

 

SHB on List of Top Firms Again

We are pleased  that U.S. News & World Report and Best Lawyers have again named Shook, Hardy & Bacon to their annual list of Best Law Firms.

Shook received 11 national rankings, including a Tier 1 listing for Mass Tort Litigation/Class Actions - Defendants. In addition, six of Shook's offices received 20 Tier 1 metropolitan rankings across 13 fields, including Commercial Litigation, Litigation - Intellectual Property, and Product Liability Litigation - Defendants. Overall, nine of Shook's offices received 42 metropolitan rankings in the three-tiered list.

We are especially pleases that your humble blogger's office in Philadelphia was ranked in Tier 1 for Mass Tort Litigation / Class Actions - Defendants, and Tier 2 for Product Liability Litigation - Defendants.

The complete rankings appear in U.S. News & World Report's Best Law Firms report.

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Meal Break Class Certification Denied

A California appeals court refused last week to revive a putative class action that alleged the defendant employer had not given employees adequate meal breaks. See In re: Walgreen Company Overtime Cases, No. B230191 (Cal. Ct. App. 2d Dist.,10/23/14).  What is interesting is that significant part of the reasoning related to the fact that multiple putative class members recanted at deposition declarations that had been prepared and submitted by class counsel. 

This class action was about meal breaks at work, and  while the company's stated policy was adequate, in practice the company allegedly departed from the policy. (California employers must give workers time off to eat meals at work.) The trial court denied plaintiffs'  motion for class certification. Plaintiff appealed.

The court of appeals noted the burden on the moving party is to “demonstrate the existence of an ascertainable and sufficiently numerous class, a well-defined community of interest, and substantial benefits from certification that render proceeding as a class superior to the alternatives.” Brinker Restaurant Corp. v. Superior Court (2012) 53 Cal.4th 1004, 1021.  California courts generally afford trial courts great latitude in granting or denying class certification, and normally review a ruling on certification for an abuse of discretion. While a class certification motion is not a license for a free-floating inquiry into the validity of the complaint’s allegations, issues affecting the merits
of a case may be enmeshed with class action requirements.  Thus, analysis of a class certification’s propriety frequently will entail some overlap with the merits of the plaintiff’s underlying claim. That cannot be helped, said the court.

A legal issue is (1) whether an employer must merely make meal breaks available, or (2) whether the employer must actually ensure employees take the breaks. Walgreens employees apparently sometimes did decide to skip or delay breaks. One employee explained, for instance, that “I generally take my lunch breaks, but about once a week I will skip lunch because I want to be able to leave work early.” Another testified that, “[e]ven though it has always been Walgreens’ policy to provide a 30-minute meal period, I preferred to skip mine and instead leave early. If I am not hungry, which is typically the case, I do not need a meal period, especially since it is unpaid time.” There
was other similar evidence about skipping or delaying breaks.  

California has adopted the make available standard. To meet this test, attorneys for the class plaintiff submitted 44 form declarations from other workers, all saying that Walgreen forced them to work through some meal breaks because their store was understaffed.  The trial court gave the declarations no weight because they were deemed unreliable. That is, most witnesses recanted their declarations to some degree or entirely at their deposition. The court of appeals stated that the prevalence of apparent falsity in the declarations raised questions about how the lawyers had created these declarations in the first place.

The trial court was “especially troubled” that, once deposed, so many witnesses recanted their declarations. The court of appeals agreed, "Form declarations present a problem. When witnesses speak exactly the same words, one wonders who put those words there, and how accurate and reliable those words are."  There is nothing attractive, said the court, about submitting form declarations contrary to the witnesses’ actual testimony. Thus, it was not error for the trial court to give these unreliable declarations no weight.

Denial of certification affirmed.

 

Federal Court Grants Defense Motion to Deny Class Certification

A federal court earlier this month denied class certification in a case involving allegedly defective Sonicare Diamond Clean and Healthy White powered toothbrushes.  Coe v. Philips Oral Healthcare, Inc., No. C13-518MJP (W.D. Wash., 10/10/14).  Readers should note this was another example of a putative class defendant taking the initiative and moving preemptively to strike class allegations.

Plaintiffs sought a certification of a nationwide class of toothbrush purchasers under the Washington Consumer Protection Act-- something having to do with the attachment of the metal shaft of the device affecting the brush strokes per minute.  Defendant moved to deny class certification. We have posted about this tactic before.  Fed.R.Civ. P. 23 does not preclude affirmative motions to deny class certification. In Vinole v. Countrywide Home Loans, Inc.,571 F.3d 935 (9th Cir. 2009), the Ninth Circuit affirmed the right of defendants to bring preemptive motions, provided that plaintiffs are not procedurally prejudiced by the timing of the motion. Id. at 994.

Resolution of the class certification issue, said the court, turned primarily on the choice-of-law analysis, which determines whether Washington law or the laws of putative class members' home states should apply. If Washington law applied, common questions were more likely to predominate for a nationwide class, and a class action may seem more efficient and desirable. On the other hand, if the consumer protection laws of the consumers' home states apply, variations in the laws will overwhelm common questions, precluding certification. The next inquiry then was whether sufficient discovery had taken place to allow for the choice-of-law analysis. The court concluded it had.

Defendant showed that an actual conflict exists between the Washington Consumer Protection Act ("WCPA") and the consumer protection laws of other states.  Because a conflict exists, the court applied Washington's most significant relationship test in order to determine which law to apply. In adopting the approach of the Second Restatement of Law on Conflict of Laws (1971), Washington has rejected the rule of lex loci delicti (the law of the place where the wrong took place).  Instead, Washington's test requires courts to determine which state has the "most significant relationship" to the cause of action.  If the relevant contacts to the cause of action are balanced, the court considers the interests and public policies of potentially concerned states and the manner and extent of such policies as they relate to the transaction. 


Washington, observed the court, has a significant relationship to alleged deceptive trade practices by a Washington corporation. Washington has a strong interest in promoting a fair and honest business environment in the state, and in preventing its corporations from engaging in unfair or deceptive trade practices in Washington or elsewhere. Conversely, said the court, the putative class members' home states have significant relationships to allegedly deceptive trade practices resulting in injuries to their citizens within their borders. The Toothbrushes were sold and purchased, and representations of their quality made and relied on, entirely outside of Washington. No Plaintiff resides in Washington. While Plaintiffs contend Philips Oral Healthcare spent considerable time and resources analyzing the problem and attempting to fix it at their Washington facilities, thus increasing Washington's relationship to the action, the crux of Plaintiffs' action involves the marketing and sale of the Toothbrushes, which took place in other states.

Furthermore, the Ninth Circuit recently recognized the strong interest of each state in determining the optimum level of consumer protection balanced against a more favorable business environment, and to calibrate its consumer protection laws to reflect their chosen balance. Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581 (9th Cir. 2012). Washington has formally adopted § 148 of the Restatement in the fraud and misrepresentation context. FutureSelect Portfolio Mgmt., Inc. v. Tremont Grp. Holdings, Inc., 180 Wn.2d 954, 331 P.3d 29, 36 (2014). Section 148 of the Restatement and its comments make clear that the alleged misrepresentation to consumers and the consumers' pecuniary injuries, both of which occurred in consumers' home states and not in Washington, should be considered the most significant contacts in this particular case. Restatement (Second) of Law on Conflict of Laws § 148 cmts. i, j (1971).


Thus, the court agreed with defendant that consumers' home states had the most significant relationship to their causes of action. Therefore, the consumer protection laws of those states, and not WCPA, would apply. Material differences between the various consumer protection laws prevent Plaintiffs from demonstrating Rule 23(b)(3) predominance and manageability for a nationwide class. Accordingly, the Court granted defendant's motion to deny certification of a nationwide class under WCPA.

 

Federal Court Denies Class Certification in "Smart Meter" Case

A Florida federal court recently denied class certification in a case alleging negligence against Honeywell  over its installation of smart electric meters at the homes of Florida Power & Light customers. See Cortes, et al. v. Honeywell Building Solutions SES Corporation, et al., No. 1:14-cv-20429 (S.D. Fla., Sept. 25. 2014). 

Plaintiffs alleged the meters were defective, damaging the connections and allegedly causing electrical arcing, which resulted in more extensive damage to items like pools and air conditioners. 
They sought certification of a class defined as “All Florida Power & Light customers in Florida who had a Smart Meter installed at their property after September, 2009 and who have suffered or will suffer unreimbursed economic loss arising from the defendant’s improper installation of the Smart Meter."

The court noted that, although the trial court should not determine the merits of the plaintiffs’ claim at the class certification stage, the trial court can and should consider the merits of the case to the degree necessary to determine whether the requirements of Rule 23 will be satisfied. Valley Drug Co. v. Geneva Pharms., Inc., 350 F.3d 1181, 1188 n.15 (11th Cir. 2003).  Indeed, sometimes it may be necessary for the court to probe behind the pleadings before coming to rest on the certification question; certification is proper only if the trial court is satisfied, after a rigorous analysis, that the
prerequisites of Rule 23 have been satisfied. Frequently that rigorous analysis will entail some overlap with the merits of the plaintiff’s underlying claim. That cannot be helped.

Before analyzing the Rule 23(a) requirements, a court must determine whether the class definition is adequate. O’Neill v. The Home Depot U.S.A., Inc., 243 F.R.D. 469, 477 (S.D. Fla. 2006); see also Bussey v. Macon Cnty. Greyhound Park, Inc., 562 F. App’x 782, 787 (11th Cir. 2014).  A vague
class definition portends significant manageability problems for the court.  O’Neill, 243 F.R.D.
at 477. “An identifiable class exists if its members can be ascertained by reference to objective criteria."   The analysis of the objective criteria also should be administratively feasible, said the court. Administrative feasibility means that identifying class members is a manageable process that does not require much, if any, individual inquiry.  Bussey, 562 F. App’x at 787.

Defendants argued that membership in the proposed class required a determination whether the
Smart Meter was improperly installed; whether the customer had unreimbursed economic loss;
and whether the loss was caused by the improper installation. The court agreed that the proposed class definition impermissibly required a finding of liability and causation at the class certification stage. For the court to determine membership, it would also need to determine the validity of putative class members’ claims and defenses to those claims. The focus on individuals’ experiences — merely to determine membership in the class — would typically require the putative class members to self-report electrical problems started occurring after the Smart Meters were installed. As such, “the only evidence likely to be offered in many instances will be the putative class member’s uncorroborated claim that he or she” observed electrical problems after the Smart Meter installation. Perez v. Metabolife Int’l, Inc., 218 F.R.D. 262, 269 (S.D. Fla. 2003). This self-interested reporting, often unverifiable but for the Plaintiffs’ own testimony, implicates defendants’ due process rights, and “individualized mini-trials would be required even on the limited issue of class membership.” Id.  The repeated use of these procedures would result in inefficient resolution of the claims, defeating one of the central purposes of the class action tool. See McGuire v. Int’l Paper Co.,
1994 WL 261360, at *5 (S.D. Miss. Feb. 18, 1994).

The court also found the definition of the class impermissibly vague in its inclusion of “customers . . . who have suffered or will suffer unreimbursed economic loss . . . .”  Plaintiffs were requesting a class to be certified of individuals who, at any point in the future, may suffer economic losses as a result of the Smart Meter installations. Apart from the considerations of causation, this proposed subset of class membership was presently impossible to determine.

The court also questioned the showing of numerosity ( a somewhat rare gem for the class action defense reader). Plaintiffs made reference to 603 FPL customer inquiries involving alleged property damage related to Smart Meter installation, but they failed to indicate whether any of these 603 inquiries involve “unreimbursed economic loss,” a requirement contained in the proposed class definition. Plaintiffs then tried to point to evidence of a subset of customers who sought repairs following installation. But nothing in plaintiffs’ factual showing indicated these customers’ problems were caused by the Smart Meter installation — as opposed to any number of other factors — or, again, involved unreimbursed economic loss, two prerequisites to membership in the proposed class. Thus, said the court, these assertions did not come close to showing the number of plaintiffs is large enough to satisfy the numerosity requirement. See Hugh’s Concrete & Masonry Co. v. Southeast Pers. Leasing, Inc., No. 8:12-CV-2631-T-17AEP, 2014 WL 794317, at *2 (M.D. Fla. Feb. 26, 2014) (“[T]he Court cannot find Plaintiff’s bases for numerosity go beyond mere speculation, bare allegations, or unsupported conclusions. Thus, Plaintiff fails the numerosity requirement.”).


Turning to predominance under Rule 23(b)(3), under the law of the Eleventh Circuit, the combination of significant individualized questions going to liability and the need for individualized assessments of damages precludes Rule 23(b)(3) certification. In re Conagra Peanut Butter Products Liab. Litig., 251 F.R.D. 689, 698 (N.D. Ga. 2008).  As is typical, plaintiffs pointed to alleged common issues of defendant's conduct, such as training of employees on installation. While defendants may well have employed similar methods of training employees to install the Smart Meters, those actions were but one component of the tort inquiry. Plaintiffs also would need to prove a breach of duty, if any, was the proximate cause of the damages. The proximate cause determinations would predominate over the determination of the common issue of defendants’ alleged conduct, due to the numerous potential causes of meter can damage. The mere fact that installers were negligent in installations does not mean that negligence caused any damages. Even assuming negligence could be proven, plaintiffs “would still have the bulk of
their cases to prove,” namely injury in fact and causation. Neenan v. Carnival Corp., 199 F.R.D.
372, 376 (S.D. Fla. 2001); see also In re Agent Orange’ Prod. Liab. Litig. MDL No. 381, 818 F.2d 145, 165 (2d Cir. 1987) (“The relevant question, therefore, is not whether Agent Orange has the capacity to cause harm, . . . but whether it did cause harm and to whom. That determination is highly individualistic [] and depends upon the characteristics of individual plaintiffs (e.g. state of health, lifestyle) and the nature of their exposure . . . .”).  The fact-finder would still need to make specific determinations of proximate causation for additional plaintiffs, which would predominate over a class-wide determination of negligence.

Certification denied.

 

Seventh Circuit Rejects Coupon Settlement Terms

The Seventh Circuit has rejected the award of attorneys' fees award for a settlement that would provide the class coupons as a remedy for allegedly printing credit card expiration dates on sales receipts. See Redman v. Radioshack Corp., No. 14-1470 (7th Cir., 9/19/14).

Judge Posner wrote for the panel.  The court had consolidated appeals in two class actions brought under the Fair and Accurate Credit Transactions Act (“FACTA”), 15 U.S.C. § 1681c(g). The Act prohibits putting "the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.”  The goal is security: a thief can of course guess at the expiration date—the date is unlikely to be more than a few years in the future and there are only 12 months in a year; so if he guesses 60 times he’s very likely to hit the jackpot. But if he guesses wrong the first few times that he places a bogus order, the card issuer typically will get suspicious and refuse to authorize his next order.  Additional reasons for requiring deletion of the expiration date include that expiration dates combined with the last four or five digits of an account number can be used to bolster the credibility of a criminal who is making pretext calls to a card holder in order to learn other personal confidential financial information.

If a violation of the statute is willful, a consumer whose receipt contains as a result of the violation data that should have been deleted, but who sustains no harm because no one stole his identity as a result of the violation, is nevertheless entitled to “statutory damages,” as distinct from compensatory or punitive damages, of between $100 and $1000. 15 U.S.C. § 1681n(a)(1)(A). (Statutory damages are in effect bounties—means of inducing private persons to enforce a
regulatory law.)  Let's put aside the court's discussion of willfulness, and focus on the class issues.

The named plaintiffs (realistically, class counsel) agreed with RadioShack on terms of settlement. The essential term was that each class member who responded positively to the notice of the proposed settlement would receive a $10 coupon that it could use at any RadioShack store. The class member could use it to buy an item costing $10 or less (but he would receive no change if the item cost less than $10), or as part payment for an item costing more. He could stack up to three coupons (if he had them) and thus obtain a $30 item, or a $30 credit against a more expensive item. He could also sell his coupon or coupons, but the coupons had to be used within six months of receipt because they would expire at the end of that period. With regard to three‐coupon stacking, the only way a member of the class could obtain more than a single coupon would be to buy one or more coupons from another class member, because the settlement allows only one coupon per
customer no matter how many of his or her RadioShack purchases involved the alleged erroneous receipts. Although the class was assumed to contain 16 million members, notice of the proposed settlement was sent to fewer than 5 million. Of those potential class members who received notice of the proposed settlement, some 83,000 —a little more than one half of one percent of the entire class, assuming the entire class really did consist of 16 million different consumers— submitted claims for the coupon in response.

The court of appeals had lots of problems with the trial court's handling of the proposed settlement, and offered a number of important observations on coupon settlements in particular.

The magistrate judge’s statement that “the fact that the vast majority of class members—over 99.99%—have not objected to the proposed settlement or opted out suggests that the class generally approves of its terms and structure” was "naive, as was her basing confidence in the fairness of the settlement on its having been based on “arms‐length negotiations by experienced counsel.” The fact that the vast majority of the recipients of notice did not submit claims hardly shows “acceptance” of the proposed settlement: rather, said Judge Posner,  it may show oversight, indifference, rejection, or transaction costs. The bother of submitting a claim, receiving and safeguarding the coupon, and remembering to have it with you when shopping may exceed the value of a $10 coupon to many class members. And “arm’s‐length negotiations” are inconsistent with the existence of a conflict of interest on the part of one of the negotiators— class counsel—that may warp the outcome of the negotiations. The magistrate judge’s further reference to “the considerable portion of class members who have filed claims” questionably treated one‐half of one percent as being a “considerable portion.”

Another controversial term of the proposed settlement was that RadioShack would pay class counsel $1 million  in attorneys’ fees, plus pay various administrative costs including the cost of notice. The agreed upon attorneys’ fees, plus the $830,000 worth of coupons at face value, plus the administrative costs, added up to about $4.1 million. Class counsel argued that since the attorneys’
fees were only about 25 percent of the total amount of the settlement, they were reasonable. The district court, agreeing, approved the settlement, precipitating this appeal by two groups of class members who objected to the settlement in the district court.

On appeal, the 7th Circuit noted that he law quite rightly requires more than a judicial rubber stamp when the lawsuit that the parties have agreed to settle is a class action. The reason is the "built‐in conflict of interest" in class action suits. The defendant typically is interested only in the bottom line: how much the settlement will cost it. And class counsel, as rational “economic man,” presumably is interested primarily in the size of the attorneys’ fees provided for in the settlement, for those are the only money that class counsel, as distinct from the members of the class, get to keep. The optimal settlement from the joint standpoint of class counsel and defendant, assuming they are self‐interested, is therefore a sum of money moderate in amount but weighted in favor of attorneys’ fees
for class counsel. The named plaintiff often is the nominee of class counsel, and in any event he is dependent on class counsel’s good will to receive the modest extra compensation ($5,000 in this case) that named plaintiffs typically receive. 

Critically the judge must assess the value of the settlement to the class and the reasonableness of the agreed‐upon attorneys’ fees for class counsel, bearing in mind that the higher the fees the less compensation will be received by the class members. When there are objecting class members, the judge’s task is eased because he or she has the benefit of an adversary process: objectors versus settlors (that is, versus class counsel and the defendant).

Here, the trial judge accepted the settlors’ contention that the defendant’s entire expenditures should be aggregated in determining the size of the settlement; it was this aggregation that reduced the award of attorneys’ fees to class counsel to a "respectable‐seeming" 25 percent. But the roughly $2.2 million in administrative costs should not have been included in calculating the division of the spoils between class counsel and class members. Those costs, said the panel, are part of the settlement but not part of the value received from the settlement by the members of the class. The costs therefore shed no light on the fairness of the division of the settlement pie between class counsel and class members. Of course, without administration and therefore administrative costs, notably the costs of notice to the class, the class would get nothing. But also without those costs class counsel would get nothing, because the class, not having learned of the proposed settlement (or in all likelihood of the existence of a class action), would have derived no benefit from class counsel’s activity.

Therefore, said the court, the ratio that is relevant to assessing the reasonableness of the attorneys’ fee that the parties agreed to is the ratio of (1) the fee to (2) the fee plus what the class members received. At most they received $830,000. That translates into a ratio of attorneys’ fees to the sum of those fees plus the face value of the coupons of 1 to 1.83, which equates to a contingent fee of 55% ($1,000,000 ÷ ($1,000,000 + $830,000)). Computed in "a responsible fashion by substituting actual for face value," the ratio would have been even higher because 83,000 $10 coupons are not worth $830,000 to the recipients. Anyone who buys an item at RadioShack that costs less than $10 will lose part of the value of the coupon because he won’t be entitled to change. Anyone who stacks three coupons to buy an item that costs $25 will lose $5. Anyone who fails to use the coupon within six months of receiving it will lose its entire value. (Six‐month coupons are not unusual, but redemption periods usually are longer. See, e.g., In re Mexico Money Transfer Litigation (Western Union & Valuta), 164 F. Supp. 2d 1002, 1010–11 (N.D. Ill. 2000) (35 months); Henry v. Sears Roebuck & Co., 1999 WL 33496080, at *10 (N.D. Ill. 1999) (nearly three years).) 

The court found it significant that no attempt was made by the magistrate judge or the parties to the proposed settlement to estimate the actual value of the nominal $830,000 worth of coupons. Couponing is an important retail marketing method, and Judge Posner postulated that it would have been possible to obtain expert testimony (including neutral expert testimony by the court’s appointing an expert, as authorized by Fed. R. Evid. 706), or responsible published materials, on consumer response to coupons. And likewise it should have been possible to estimate the value of
couponing to sellers—a marketing device that in some circumstances must be more valuable than cutting price, as otherwise no retailer would go to the expense of buying and distributing coupons.

The court re-emphasized that in determining the reasonableness of the attorneys’ fee agreed to in a proposed settlement, the central consideration is what class counsel achieved for the members of the class rather than how much effort class counsel invested in the litigation. The court noted that in so doing it was not  taking sides in a controversy over the interpretation of the coupon provisions
of the Class Action Fairness Act, which states in part that If a proposed settlement in a class action provides for a recovery of coupons to a class member, the portion of any attorney’s fee award to class counsel that is attributable to the award of the coupons shall be based on the value
to class members of the coupons that are redeemed. Judge Posner thinks "this is a badly drafted statute." To begin with, read literally, the statutory phrase “value to class members of the coupons
that are redeemed” would prevent class counsel from being paid in full until the settlement had been fully implemented. For until then one wouldn’t know how many coupons had been redeemed. An alternative interpretation of “value … of the coupons that are redeemed” would be the face value of the coupons received by class members who responded positively to notice of the class action. In this case that would be 83,000 of the millions of class members who received notice, though not all 83,000 will actually use the coupon.

Perhaps there is no need for a rigid rule—a final choice, for all cases, among the possibilities suggested. In some cases the optimal solution may be part payment to class members and
class counsel up front with final payment when the settlement is wound up. That might be appropriate in a case such as this, said the court. What was inappropriate, however, was an attempt to determine the ultimate value of the settlement before the redemption period ended without even an estimate by a qualified expert of what that ultimate value was likely to prove to be.

Some had called this  an “all‐coupon” case (only benefit was a coupon), but class counsel call it a “zero‐coupon” case. They argued that a coupon that can be used to buy an entire product, and not just to provide a discount, is a voucher, not a coupon. “Voucher” was indeed the term used in the settlement agreement, because the parties didn’t want to subject themselves to the coupon  provisions of the Class Action Fairness Act. But the idea that a coupon is not a coupon if it can ever be used to buy an entire product didn't make any sense to Judge Posner, certainly in terms of the
Act. Why would it make a difference, so far as the suspicion of coupon settlements that animates the Act’s coupon provisions is concerned, that the proposed $10 coupon could be used either to reduce by $10 the cash price of an item priced at more than $10, or to buy the entire item if its price were
$10 or less? Coupons usually are discounts, but if the face value of a coupon exceeds the price of an item sold by the issuer of the coupon, the customer often is permitted to use the coupon to buy the item—and sometimes he’ll be refunded the difference between that face value and the price of the item.

This case illustrated, said the panel, why Congress was concerned that class members can be shortchanged in coupon settlements whether a coupon is used to obtain a discount off the full
price of an item or to obtain the entire item; class counsel’s proposed distinction between discount coupons and vouchers also would impose a heavy administrative burden in distinguishing
coupons used for discounts on more expensive items (“coupons” in class counsel’s narrow sense of coupon) and the identical coupons used to pay the full prices of cheaper items (“vouchers” in class counsel’s lexicon and not “coupons” at all).  Assessing the reasonableness of attorneys’ fees based on a coupon’s nominal face value instead of its true economic value was no less troublesome when the coupon may be exchanged for a full product.

The difficulty of valuing a coupon settlement exposed for the court another defect in the proposed settlement: placing the fee award to class counsel and the compensation to the class members in separate compartments. The $1 million attorneys’ fee is guaranteed, while the benefit of the settlement to the members of the class depends on the value of the coupons, which may well turn out to be much less than $830,000. This guaranty is the equivalent of a contingent‐fee contract that entitles the plaintiff’s lawyer to the first $50,000 of the judgment or settlement plus one‐third of any amount above $50,000—so if the judgment or settlement were for $100,000 the attorneys’ fee would be $66,667, leaving only a third of the combined value (to plaintiff and lawyer) of the
settlement to the plaintiff. Another questionable feature of the settlement for the appeals court was the inclusion of a “clear‐sailing clause”—a clause in which the defendant agreed not to contest class counsel’s request for attorneys’ fees. Because it’s in the defendant’s interest to contest that request in order to reduce the overall cost of the settlement, the defendant won’t agree to a clear‐sailing clause without compensation—namely a reduction in the part of the settlement that goes to the class members, as that is the only reduction class counsel are likely to consider. The existence
of such clauses thus illustrates the danger, said the court, of collusion in class actions between class counsel and the defendant, to the detriment of the class members.

The panel was also bothered by the fact that class counsel did not file the attorneys’ fee motion until after the deadline set by the court for objections to the settlement had expired. That violated Rule 23(h). See In re Mercury Interactive Corp. Securities Litigation, 618 F.3d 988, 993–95 (9th Cir. 2010); see also Committee Notes on the 2003 Amendments to Rule 23. From reading the proposed settlement the objectors knew that class counsel were likely to ask for $1 million in attorneys’ fees, but they were handicapped in objecting because the details of class counsel’s hours and expenses were submitted later, with the fee motion, and so they did not have all the information they needed to justify their objections. 

So, coupon settlement and fee rejected.

Court of Appeals Addresses Class-wide Arbitration Issue

Our loyal readers know that the decision whether a matter gets sent to arbitration, as opposed to being adjudicated through traditional litigation, can have profound impact, including on timing and costs to the litigants. Even more so, when the case is a proposed class action. A few weeks ago, the Third Circuit weighed in on the issue of the availability of class-wide arbitration, holding that it is generally a question for the court, not an arbitrator, to decide.  See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir., July 30, 2014). This week, the petition for rehearing was denied by the panel and the en banc court. See Opalinski v. Robert Half Int'l Inc., No. 12-4444 (3d Cir.) (petition for rehearing denied, 8/27/14).

The plaintiffs brought claims under the Fair Labor Standards Act.  The court noted that the issue was whether a district court, rather than an arbitrator, should decide if an agreement to arbitrate disputes
between the parties to that agreement also authorizes class-wide arbitration. Because of the fundamental differences between class-wide and individual arbitration, and the consequences of proceeding with one rather than the other, the court of appeals concluded that the availability of class-wide arbitration is a substantive “question of arbitrability” to be decided by a court, absent clear agreement otherwise. The only other Circuit Court of Appeals to have squarely resolved the “who decides” issue is the Sixth, which has also held that “whether an arbitration agreement permits
class-wide arbitration is a gateway matter” that is presumptively “for judicial determination.” Reed Elsevier, Inc. v. Crockett, 734 F.3d 594, 599 (6th Cir. 2013).

Plaintiffs had signed employment agreements that contained arbitration provisions. They provided that “[a]ny dispute or claim arising out of or relating to Employee’s employment, termination of employment or any provision of this Agreement” shall be submitted to arbitration. Neither agreement mentioned class-wide arbitration.  Defendant moved to compel arbitration of plaintiffs' claims on an individual basis. The District Court granted the motion in part, thus compelling arbitration but holding that the propriety of individual (also known as bilateral) versus class-wide arbitration was for the arbitrator to decide.

The first part of the analysis was whether the availability of class-wide arbitration is a “question of arbitrability.” See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).  If yes, it is presumed that the issue is “for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id.  If the availability of class-wide arbitration is not a “question of arbitrability,” it is presumptively for the arbitrator to resolve. See First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944-45 (1994). “Questions of arbitrability” are limited to a narrow range of gateway issues. They may include, for example, whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy. On the other hand, questions that the parties would likely expect the arbitrator to decide are not “questions of arbitrability.”  The Third Circuit has explained that questions of arbitrability generally fall into two categories – (1) when the parties dispute whether they have a valid arbitration agreement at all (whose claims the arbitrator may adjudicate); and (2) when the parties are in dispute as to whether a concededly binding arbitration clause applies to a certain type of
controversy (what types of controversies the arbitrator may decide). Puleo v. Chase Bank USA, N.A., 605 F.3d 172, 178 (3d Cir. 2010).

By seeking class-wide arbitration, plaintiffs contended that their arbitration agreements empower the arbitrator to resolve not only their personal claims but the claims of additional individuals not currently parties to this action. The determination whether defendant must include absent individuals in its arbitrations with named plaintiffs affects whose claims may be arbitrated and is thus a question of arbitrability to be decided by the court. Second, while plaintiffs argued that, because class actions in the context of traditional litigation are a procedural construct, the availability of class-wide arbitration is also a procedural question, the Supreme Court, in Stolt-Nielsen, SA v. Animal Feeds Int'l Corp., had expressly disclaimed class-wide arbitration as simply procedural. 559 U.S. at 687 (the differences between class and individual arbitration cannot be characterized as a question of “merely what ‘procedural mode’ [i]s available to present [a party’s] claims”). The Court stated that class action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.

Moreover, it is presumed that courts must decide questions of arbitrability unless the parties clearly and unmistakably provide otherwise, said the court. The burden of overcoming the presumption is onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator. Here, the plaintiffs' employment agreements provided for arbitration of any dispute or claim arising out of or relating to their employment but are silent as to the availability of class-wide arbitration or whether the question should be submitted to the arbitrator. Nothing else in the agreements or record suggests that the parties agreed to submit questions of arbitrability to the arbitrator.

This case was remanded for the District Court to determine whether appellees’ employment agreements call for class-wide arbitration.

 

 

PhRMA Submits Amicus Brief on First Amendment Issues

The Pharmaceutical Research and Manufacturers of America recently submitted an amicus brief urging a federal court to dismiss a whistleblower's False Claims Act suit because the off-label claims in the case violate the defendants' free speech rights. See U.S. ex rel. Solis v. Millennium Pharmaceuticals Inc. et al., No. 2:09-cv-03010 (E.D. Cal. Brief August 15, 2014). The Pharmaceutical Research and Manufacturers of America (“PhRMA”) is a voluntary, nonprofit association representing the nation’s leading research-based pharmaceutical and biotechnology companies.

Readers know that physicians may lawfully prescribe FDA-approved drugs to treat any condition or disease, including unapproved uses, based on their independent medical judgment. See Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S. 341, 350 (2001). Indeed, many unapproved uses are integral to the practice of medicine, and reflect the standard of patient care. E.g., Joseph W. Cranston et al., Report of the Council on Scientific Affairs: Unlabeled Indications of Food and Drug Administration-Approved Drugs, 32 Drug Info. J. 1049, 1050 (1998). The case here involved a qui tam False Claims Act (FCA) suit against defendants. This case raises serious First Amendment concerns, said amicus, because relator’s and the United States’ construction of the FCA would impose liability on manufacturers for engaging in truthful speech about “off-label” uses of their drugs, i.e., particular uses of an FDA-approved medication that the FDA has not yet approved. The First Amendment unquestionably protects such truthful and non-misleading speech. E.g., Sorrell v. IMS Health Inc., 131 S. Ct. 2653, 2659 (2011).  The prevalence of unapproved—but fully legal—uses of many FDA-approved prescription medicines to treat patients makes it critical that healthcare professionals have access to accurate, comprehensive, and current information about such uses. 

Notably, pointed out amicus, neither relator nor the government alleged that the speech at issue here—relaying reprinted articles about unapproved uses of the drug Integrilin from peer-reviewed journals, and summarizing the results of clinical trials—was false or misleading. Relator and the United States did not even agree on why the FCA proscribes this speech, or how this speech somehow causes others to submit false claims. But their interpretations of the FCA shared a critical flaw according to the Brief: both threaten core First Amendment rights and should be rejected under principles of constitutional avoidance. See Edward J. DeBartolo Corp. v. Fla. Gulf Coast Bldg. & Const. Trades Council, 485 U.S. 568, 575 (1988).

These constitutional concerns seem well-founded: “Speech in aid of pharmaceutical marketing . . . is a form of expression protected by the Free Speech Clause of the First Amendment.” Sorrell, 131 S. Ct. at 2659. Interpreting the FDCA to punish manufacturers for truthfully speaking about unapproved uses impermissibly restricts speech based on its content and the identity of the speaker, and thus triggers heightened scrutiny. These First Amendment concerns apply with particular force to the speech that relator targeted here. The Complaint alleged that the manufacturer merely distributed reprints of medical studies published in reputable independent journals like Cardiology, the American Heart Journal, and the American Journal of Cardiology, and sent letters accurately relaying summaries of clinical trials.  There was no question that the authors of the reprints, the studies’ investigators, physicians, or anyone other than manufacturers can speak about the reprints and trial results as much as they wish. Indeed, everyone but manufacturers apparently can talk to physicians about prescribing Integrilin for unapproved uses without penalty. Relator even conceded that the manufacturer can distribute reprints promoting unapproved uses so long as physicians request such information.

Physicians who received the reprints or other information from the manufacturer in this case received precisely the type of educational information that a trained physician would wish to receive about his patients. Physicians were not only free to disregard these reprints; their Hippocratic Oath obligated them to use their own, independent medical judgment as to whether a given prescription was warranted. And after those physicians prescribed the FDA-approved drug for an unapproved use, hospitals then made additional, independent determinations whether the prescriptions were reimbursable. Only after that did hospitals submit claims to the government.

A good summary of the issues from defense perspective.