Federal Court Rejects Fraud Class Action

A federal court stayed a  rejected proposed class action pending the outcome of plaintiffs' petition for interlocutory appeal of the class certification denial.  See Wiedenbeck v. Cinergy Health Inc., No. 12-cv-508-wmc (W.D. Wis., 9/20 class decision; stay 10/15/13).

Readers may be interested in the logic of the denial. Plaintiffs alleged that defendants used false or misleading infomercials to induce the purchase of a medical benefit plan that was deceptively limited, and then acted in bad faith in denying coverage under the plan.  The plaintiffs sought class certification for their fraud claim for a class of for all Wisconsin residents who purchased an insurance policy since Jan. 1, 2007.

Before addressing the specific requirements for class certification, the court discussed various Seventh Circuit precedents, including Thorogood v. Sears, Roebuck & Co., 547 F.3d 742 (7th Cir. 2008), in which the Seventh Circuit reversed the district court‟s order certifying a class because common issues of law or fact did not predominate over issues particular to each putative class member's purchase of the defendant's dryer. Thorogood alleged that the words “stainless steel” imprinted on the dryer were deceptive because the dryer drum was not made entirely of stainless steel.  In rejecting plaintiff‟s motion, the Seventh Circuit concluded that a fraud claim necessarily would turn on each class member's understanding of the meaning of the “stainless steel” label, reasoning that at least some portion of the class -- and, based on the court‟s pointed query, “Does anyone believe this besides Mr. Thorogood?”, perhaps all -- would not share the plaintiff‟s understanding of this point-of-sale advertisement. 

The court concluded that this case was arguably even less suited for class treatment than Thorogood.  Plaintiffs relied on different television commercials with different language; moreover, the record demonstrated that given the dates they aired, some class members could not have seen the alleged uniform representations. Defendants used at least 10 different "call scripts" for telemarketing, and transcripts of calls showed each representative responding to specific, individual questions posed by or information received from the customer, meaning the content of actual consumer calls necessary would vary.  There was evidence some consumers received other, material information about the policy at issue, which may have impacted their individual purchase decisions. For example, it is undisputed that purchasers had ten days to cancel the policy from receipt of a member handbook provided post-purchase.  Thus, there was evidence of no common misrepresentation, and no evidence of a common understanding by class members. 

Readers will note the response to plaintiffs' argument that a fraud claim is subject to common proof because the reasonableness of a consumer's reliance (or whether the reliance is justified) is allegedly judged from an “objective” standard. Even if true, an intentional misrepresentation claim under Wisconsin law still requires a plaintiff to demonstrate that he or she actually relied on the false representation (i.e., was misled), which is separate from any inquiry as to whether the reliance was justified or reasonable. And for this element, plaintiffs provided no basis for proving reliance or causation on a class-wide basis.  The courts have repeatedly rejected attempts to certify a class where a fraud claim turns on an individual's understanding in order to demonstrate causation or reliance.  Accordingly, plaintiffs could not meet the commonality prong of Rule 23. 

Final point worth noting, the court also declined to certify a single issue class. There was no common representation, so there really was no single issue as asserted by plaintiffs.

 

Consumer Fraud Class Claim Dismissed in Beverage Case

Readers have seen our warning about the trend in food and beverage claims attacking virtually every aspect of the product's label as a supposed consumer fraud act violation. A federal court earlier this month dismissed just such a proposed class action challenging the labeling on VitaRain Tropical Mango Vitamin Enhanced Water Beverage.  See Maple v. Costco Wholesale Corp., No. 12-5166 (E.D. Wash., 8/1/13).

Plaintiffs alleged in their amended complaint that one defendant manufactured and bottled a product known as VitaRain Vitamin Enhanced Water Beverage. VitaRain came in four flavors: Tropical Mango, Raspberry Green Tea, Kiwi Strawberry, and Dragonfruit. The product was marketed and distributed by another defendant and sold at Costco warehouses throughout the
country. Plaintiffs alleged that the VitaRain Tropical Mango drink in particular was marketed as a natural product but in fact contained “unnatural” ingredients, including large amounts of “synthetic caffeine.” Specifically, plaintiffs alleged that the VitaRain Tropical Mango drink (1) lacked a front-facing disclosure that the beverage contained caffeine; (2) failed to disclose the relative amount of caffeine in the beverage; and (3) falsely claimed that the beverage is a “natural tonic” and
contains “natural caffeine.” Plaintiffs further alleged they “reasonably believed that they [had] purchased a Drink similar to vitamin water.” 

On behalf of a putative class consisting of all Washington residents who purchased the product over the four years preceding the filing of the lawsuit, the named plaintiff asserted claims for (1) violations of the Washington Consumer Protection Act; (2) misrepresentation; and (3) negligence.

Defendant Costco moved to dismiss the amended complaint, contending, inter alia, that some
of plaintiff’s claims were preempted by federal law; and that parts of the amended complaint failed to meet the pleading standards of Rules 8 and 9(b) of the Federal Rules of Civil Procedure.

To withstand dismissal, a complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). “Naked assertion[s],” “labels and conclusions,” or “formulaic recitation[s] of the elements of a cause of action will not do.” Id. at 555, 557.  A claim has facial plausibility only "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

First an interesting civil procedure issue. Ordinarily, when the district court considers matters outside the pleadings it must convert a motion to dismiss brought under Civil Rule 12(b)(6) into a Civil Rule 56 motion for summary judgment. Fed. R. Civ. P. 12(d). However, a court may consider certain materials without converting the motion to dismiss into a motion for summary judgment. See, e.g., United States v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003). Such materials include documents attached to the complaint, documents incorporated by reference in the complaint, or matters of judicial notice.  A document may be incorporated by reference into a complaint where the
plaintiff refers extensively to the document or the document forms the basis of plaintiff’s claim. In such cases, the defendant may offer that document and the district court may treat the document as part of the complaint for the purposes of a motion to dismiss. Here, the court concluded that judicial notice of the product label was appropriate and that it could consider the labeling without converting Costco’s motion to dismiss into one for summary judgment.

Defendants argued that plaintiff’s claims were expressly preempted by the Federal Food Drug and Cosmetics Act (“FDCA”), as amended by the National Labeling and Education Act (“NLEA”), 21 U.S.C. § 301 et seq. The FDCA “comprehensively regulates food and beverage labeling.” Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170, 1175 (9th Cir. 2012).  And specifically, they govern whether and how a label must disclose the presence of caffeine.  Here, the Amended Complaint sought "to create and impose”  two new requirements which would directly conflict with federal law: (1) a requirement that caffeinated beverages disclose the fact that they contain caffeine on the front label; and (2) a requirement that labels state the “relative amount” of caffeine by providing a “daily value” amount.  By virtue of imposing these new and conflicting requirements, defendants contended, plaintiff’s claims were preempted.  The court agreed; defendants showed that these food labeling requirements are expressly covered by the regulations. Federal law preempts any state law that would impose additional requirements on how food labels present nutrition information.  See Turek v. Gen. Mills, Inc., 662 F.3d 423, 426 (7th Cir. 2011).  Specifically, the court held that federal law preempts plaintiff’s claims that (1) defendants were required to disclose that the drink contained caffeine on the front label of the drink and (2) that defendants were required to state the “relative amount” of caffeine in the drink. Therefore Costco’s motion to dismiss was granted as to these claims.

Next, defendants contended that plaintiff had also failed to adequately plead causation, an element of the remaining consumer fraud-based allegations. Specifically, defendants argued that plaintiff had not alleged that he even read the complained-of labels before purchasing the VitaRain drink. The court noted that while the amended complaint contained detailed allegations about what was, and what was not, on the label of the VitaRain Tropical Mango drink he allegedly purchased, nowhere did he state that he actually read the label, or that his purchasing decision was driven by the alleged deceptive statements on the label.  Broad conclusory statements on causation. such as that class members have suffered "as a result of" purchasing the energy Drink, were insufficient, especially in light of Plaintiff’s failure to allege that he even read the allegedly deceptive labels prior to purchasing the drink.

Finally, on the misrepresentation claims, defendants suggested that plaintiff could not prove the reliance elements of his fraudulent misrepresentation and negligent misrepresentation claims because he had not alleged that he saw the alleged misrepresentations prior to purchasing
the drink. The court dismissed plaintiff’s misrepresentation claim for the same reason that the CPA claim was dismissed: Plaintiff failed to adequately plead reliance because he had not alleged that he based his purchasing decision on the complained-of labels or that he even read the labels
prior to purchasing the drink.  The court refused to credit the naked assertion that he would not have purchased the drink had the label not contained such statements in light of the missing averments.

Claims dismissed (with leave to amend).

 

Successor Liability Rejected in Aircraft Case

One of the interesting types of projects your humble blogger gets to work on from time to time concerns product liability and mass tort issues that arise from the M&A context, including due diligence going into a deal and successor liability issues coming out of a deal.  Recently a federal court held that the successor to the assets of an aircraft manufacturer was not liable for injuries arsing from the crash of an airplane built before the acquisition. See Thornton v. M7 Aerospace LP, No. 12 C 329, (N.D. Ill., 10/23/12).

The aircraft was a Fairchild Aircraft SA227-DC Metro 23, with tail number VH-TFU.  On approach to Lockhart River Airport, Australia, the aircraft crashed, resulting in the deaths of the passengers and crew. The incident was one of the worst civil aviation accidents in Australian history.  The plane was designed, manufactured, assembled, tested, and sold by Fairchild Aircraft, Inc. Fairchild went bankrupt in 2002 and as a result, Fairchild and defendant executed an Asset Purchase Agreement.  The agreement stated that the buyer/defendant assumed no ”liability for personal injury or property damage arising at any time out of or in connection with goods manufactured, produced, distributed or sold by the Sellers prior to the Closing Date, including but not limited to any Product Liability claims." 

In 2007, plaintiffs commenced this negligence and strict products liability action against numerous defendants including defendant M7. In the Second Amended Complaint, plaintiffs asserted claims against M7 in two categories: direct claims and indirect claims. First, plaintiffs’ indirect claims sought to impose vicarious liability on defendant as successor-in-interest to Fairchild. Plaintiffs alleged that defendant “is indirectly liable in strict product liability and negligence for the actions of its predecessor, Fairchild, in its defective and negligent design of the [Subject Aircraft], its failure to warn of the defects and its failure to advise operators to fit the aircraft with an "Enhanced Ground Proximity Warning System.” Second, plaintiffs’ direct claims sought to impose liability on defendant for its independent conduct in allegedly breaching of its own duty to so warn and advise.

The EGPWS claims argued M7 was negligent in failing to advise the owner and operator of the aircraft to install a new system that system was an improvement on the conventional ground proximity warning system because, among other reasons, it allegedly was capable of providing increased warning time to pilots about potential terrain conflicts by incorporating additional functions into the conventional ground proximity warning system.

Defendant moved for summary judgment.  On plaintiff’s claims of successor liability, it argued that
M& had as a matter of law “no liability as the successor corporation to Fairchild.” The Court agreed.
Under applicable Illinois law, a corporation which purchases the assets of another corporation is not generally liable for the debts and liabilities of the transferor in the absence of an agreement providing otherwise. The court explained that this traditional rule of successor corporate non-liability developed as a response to the need to protect bona fide purchasers from unassumed liability and was designed to maximize the fluidity of corporate assets. See Diguilio v. Goss Int’l Corp., 389 Ill. App. 3d 1052, 1059-60, 329 Ill. Dec. 657, 906 N.E.3d 1268 (Ill. App. Ct. 2009).

 A successor corporation can face liability, if one of the following four exceptions applies: (1) if there is an express or implied agreement of assumption; (2) if the transaction between the purchaser and the seller corporation is a consolidation or merger; (3) if the purchaser is a continuation of the seller; or (4) if the transaction is an attempt to escape liability for the seller’s obligations.  Illinois does not recognize the so-called product line exception.

Here, the undisputed evidence showed that the Bankruptcy Court approved the transfer of
Fairchild’s assets “free and clear of any and all liens, claims and encumbrances”, and to a purchaser that was not an insider, affiliate or owner of Fairchild. Plaintiffs argued that defendant ought to have successor liability because it “impliedly assumed Fairchild’s continuing duty to warn.”  But, the court noted, the question is not whether M7 impliedly assumed a duty to warn, but rather whether M7 had an implied agreement with Fairchild whereby M7 agreed to assume Fairchild’s liabilities.  And it did not.

On the direct claim, plaintiffs alleged that defendant owed – and breached – an independent duty to advise owners and operators of the accident aircraft to fit that aircraft with an Enhanced Ground Proximity Warning System. To prevail on their claims of direct (i.e. non-successor) liability, plaintiffs needed to establish that defendant owed an independent duty to warn of the alleged defects in the plane.  Illinois courts have recognized a limited cause of action against the purchaser of a
product line for failing to warn of defects in its predecessor’s products. See Kaleta v. Whittaker Corp., 221 Ill. App. 3d 705, 715, 164 Ill. Dec. 651, 583 N.E.2d 567 (1991).  The critical element required for the imposition of this duty is a continuing relationship between the successor and the
predecessor’s customers benefitting the successor. To determine the presence of a nexus or
relationship effective to create a duty to warn, the following factors are considered: (1) succession to a predecessor’s service contracts; (2) coverage of the particular machine under a service contract; (3) service of that machine by the purchaser corporation; and (4) a purchaser corporation’s knowledge of defects and of the location or owner of that machine.

Here, viewing the evidence in the light most favorable to plaintiffs, there was an insufficient nexus or relationship between defendant and the operator of the aircraft to impose an independent duty to warn upon defendant. Plaintiffs focused their argument on the relationship between defendant and the product line generally, but that is not the legal standard: Illinois law focuses on the relationship between the successor (here, defendant) and the operator of the allegedly defective unit (here, Transair).  It was undisputed that M7 did not assume any of Fairchild’s serve contracts relating
to the plane, and that M7 never serviced, maintained, or repaired the plane. There was no evidence that it worked on or had any contact with the subject aircraft.

Finally, under a voluntary undertaking theory of liability, the duty of care to be imposed upon a defendant is limited to the extent of the undertaking.” Bell v. Hutsell, 2011 IL 110724, 353 Ill. Dec. 288, 293-95, 955 N.E.2d 1099 (2011) (stating that Illinois courts look to the Restatement (Second) of Torts to define the theory). Here, defendant argued that plaintiffs’ voluntarily undertaking theory fails because even if it undertook a duty (which it disputed) regarding warnings and advice to owners and operators, plaintiffs failed to proffer sufficient evidence of reliance. Again, the Court agreed. Illinois law requires proof of reliance; that is, proof that the operator (here, Transair) relied on the defendant’s voluntary undertaking of a duty to warn. See, e.g., Chisolm v. Stephens, 47 Ill. App. 3d 999, 7 Ill. Dec. 795, 365 N.E.2d 80, 86 (Ill. App. Ct. 1977). Plaintiffs offered no such proof.

Summary judgment granted.

Consumer Fraud Class Action Decertified in Drug Case

A state appeals court last week de-certified a class action by consumers over alleged misrepresentations in marketing a drug.  See Merck & Co. v. Ratliff, No. 2011-000234 (Ky. Ct. App.,  2/10/12).

The case involved the drug Vioxx, which was a highly effective medication formerly in widespread use for patients with arthritis and other conditions causing chronic or acute pain.  Plaintiff was a former user of Vioxx for his chronic osteoarthritis.  Although Ratliff’s insurance paid for most of the cost of the drug, which was at the time approximately $66 per month, Ratliff contributed about $5 each month out of pocket.  Ratliff discontinued using Vioxx in early 2004.

Plaintiff brought a putative class action on behalf of product users who had not suffered cardio-vascular side effects, alleging that the defendant deceived the members of the proposed class in violation of the state Consumer Protection Act by promoting and/or allowing the sale of Vioxx with the use of unfair, false, misleading or deceptive acts or practices.  As a result, the class purchased the drug when it wouldn't have otherwise.

The case followed a twisting path, to federal court, to the MDL, back to state court, up to the state supreme court on mandamus, and back.  Long story short, the class was certified by the trial court, and that decision eventually became ripe for review by the court of appeals.

The Kentucky rules are similar to the federal class action rules. The trial court certified the class under the prong (like b3) requiring that the questions of law or fact common to members of the class predominate over any questions affecting only individual members, and that a class action
is superior to other available methods for the fair and efficient adjudication of the controversy. The trial court found that common questions of law and fact did predominate, stating that there was a common nucleus of facts from which the potential plaintiffs’ claims arose. All of the potential
plaintiffs were prescribed Vioxx by doctors who supposedly relied on Merck’s assertions that it was safe and effective.

On appeal, Merck contended that plaintiff’s claims would require individualized proof such that common questions would not predominate. Merck argued that individual proof would be necessary to show that Merck made fraudulent or negligent misrepresentations toward each putative class member or his or her physician through the marketing and sale of Vioxx, that the alleged
misrepresentations were received by each putative member’s physician, that each putative member’s physician relied on such representations in his or her decision to prescribe Vioxx over another drug, and the amount of any damages suffered by each putative member.

The court of appeals noted that the common law misrepresentation claims would require proof of causation in the nature of reliance, and while "there are fewer obstacles to a class claim proceeding under the" state consumer protection act, that law still requires loss as a result of the wrongful act. Plaintiffs alleged that there was supposedly a consistent pattern of deception lasting essentially the entire time that Vioxx was on the market, and thus that generalized proof could be used to show the elements of fraud and misrepresentation in this case. This theory concerning generalized proof regarding Merck’s alleged conduct was similar to the rebuttable presumption of reliance and causation known in securities litigation as "fraud-on-the-market." The court of appeals noted that the “fraud-on-the-market” approach had never been recognized in the state for a fraud or misrepresentation case. Indeed, pretty much every other jurisdiction which has been confronted with the theory has rejected it outside of the securities litigation context. See, e.g., Kaufman v. i-Stat Corp, 754 A.2d 1188, 1191 (N.J. 2000); International Union of Operating Engineers Local No. 68 Welfare Fund v. Merck & Co., Inc, 929 A.2d 1076, 1088 (N.J. 2007); Mirkin v. Wasserman, 858 P.2d 568, 584-95 (CA. 1993); Southeast Laborers Health and Welfare Fund v. Bayer Corp., 2011 WL 5061645 (11th Cir. 2011); Buckman Co. v. Plaintiffs’ Legal Committee, 531 U.S. 341 (2001).

Accordingly, causation, reliance, and damages must be shown on an individual basis. Thus, if the action were tried as a class, even after the alleged common questions of Merck’s representations were decided, the case would essentially fragment into a series of amalgamated “mini-trials” on each of these individualized questions. Because these individualized questions would substantially overtake the litigation, and would override any common questions of law or fact concerning defendant’s alleged conduct, the court found that a class action was not the superior mechanism by which to try these cases. See, e.g., Zinser v. Accufix Research Institute, Inc., 253 F.3d 1180, 1192 (9th Cir. 2001).

 

 

Ninth Circuit Decertifies Consumer Fraud Class

The Ninth Circuit last week reversed the certification of a nationwide class raising consumer fraud claims against an auto maker. See Mazza, et al. v. American Honda Motor Co., No. 09-55376 (9th Circuit). 

Honda appealed the district court’s decision to certify a nationwide class of all consumers who purchased or leased Acura RL's equipped with a Collision Mitigation Braking System (“CMBS”). The plaintiffs alleged that certain advertisements misrepresented the characteristics of the CMBS and supposedly omitted material information on its limitations. The complaint stated four claims under California Law, specifically the California Unfair Competition Law (UCL), Cal. Bus. & Prof. Code § 17200 et seq., False Advertising Law (FAL), Cal. Bus. & Prof. Code § 17500 et seq., the Consumer Legal Remedies Act (CLRA), Cal. Civil Code § 1750 et seq., and a claim for unjust enrichment.  Readers know those are the typical claims in a consumer fraud case in the popular forum of California.

The Ninth Circuit held that the district court erred because it erroneously concluded that California law could be applied to the entire nationwide class, and because it erroneously concluded that all consumers who purchased or leased the relevant Acura RL can be presumed to have relied on defendant’s advertisements, which allegedly were misleading and omitted material information.

In 2007, plaintiffs bought Acura RL's from authorized Acura dealerships, and the vehicles were equipped with the CMB System. In December 2007, they filed a class action complaint alleging
that Honda misrepresented and concealed material information in connection with the marketing and sale of Acura RL vehicles equipped with the CMBS. According to Plaintiffs, Honda did not warn consumers (1) that its CMB collision avoidance system’s three separate stages may "overlap,"  (2) that the system may not warn drivers in time to avoid an accident, and (3) that it allegedly shuts off in bad weather.

The district court certified a nationwide class of people in the United States who, between August 17, 2005 and the date of class certification, purchased or leased new or used Acura RL vehicles
equipped with the CMBS. The district court concluded that California law could be applied to all class members because Honda did not show how the differences in the laws of the various states were material, how other states might have an interest in applying their laws in this case, and how these interests were implicated in this litigation. It also held that class members were entitled to an
inference of reliance under California law.

Before certifying a class, the trial court must conduct a rigorous analysis to determine whether the party seeking certification has met the prerequisites of Rule 23.  The party seeking class certification has the burden of affirmatively demonstrating that the class meets the requirements
of Federal Rule of Civil Procedure 23. And, under Rule 23(b)(3), a plaintiff must demonstrate the
superiority of maintaining a class action and show that the questions of law or fact common to class members predominate over any questions affecting only individual members.  Here, Honda contended that common issues of law did not predominate because California’s consumer protection statutes may not be applied to a nationwide class with members in 44 jurisdictions.
It further contended that common issues of fact did not predominate because the court  impermissibly relied on presumptions that all class members were exposed to the allegedly
misleading advertising, that they relied on misleading information in making their purchasing decision, and that they were damaged as a result.

First, choice of law. Under California’s choice of law rules, the class action proponent bears the initial burden to show that California has significant contact to the claims of each class member. Also, California law may only be used on a class-wide basis if the interests of other states are not found to outweigh California’s interest in having its law applied.  Honda argued that the district court misapplied the three-step governmental interest test.  The Ninth Circuit agreed. The district court abused its discretion in certifying a class under California law that contained class members
who purchased or leased their car in different jurisdictions with materially different consumer protection laws.  For example, some state consumer fraud laws have no scienter requirement, whereas many other states’ consumer protection statutes do require scienter. See, e.g., Colo.
Rev. Stat. 6-1-105(1)(e), (g), (u) (knowingly); N.J. Stat. Ann. § 56:8-2 (knowledge and intent for omissions); Debbs v. Chrysler Corp., 810 A.2d 137, 155 (Pa. Super. 2002) (knowledge
or reckless disregard).  Some states require named class plaintiffs to demonstrate reliance, while some other states’ consumer protection statutes do not.  These differences are "not trivial or wholly immaterial."  

The court of appeals reminds us that consumer protection laws are a creature of the state in which they are fashioned. They may impose or not impose liability depending on policy choices made by state legislatures. Each state has an interest in setting the appropriate level of liability for companies conducting business within its territory.  Maximizing consumer and business welfare, and achieving the correct balance for society, does not inexorably favor greater consumer protection; instead, setting a baseline of corporate liability for consumer harm requires balancing these competing interests.  Getting the optimal balance between protecting consumers and attracting foreign businesses, with resulting increase in commerce and jobs, is not so much a policy decision committed to a federal appellate court, or to particular district courts where a plaintiff may sue, as it is a decision properly to be made by the legislatures and courts of each state. More expansive consumer protection measures may mean more or greater commercial liability, which in turn may result in higher prices for consumers or a decrease in product availability.  Here, the district court did not adequately recognize that each foreign state has an interest in applying its law to transactions within its borders and that, if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce.

The court of appeals also found that the district court abused its discretion in finding that common issues of fact predominated, because the scale of the advertising campaign here did not support a presumption of reliance, even if one were legally available.  It was likely that many class members were never exposed to the allegedly misleading advertisements, insofar as advertising of the challenged system was very limited. And it was not dispositive that Honda’s advertisements were allegedly misleading because of the information they omitted, rather than the information they claimed.  For everyone in the class to have been exposed to the omissions, it was necessary for everyone in the class to have viewed the allegedly misleading advertising. Here the limited scope of that advertising makes it unreasonable to assume that all class members viewed it.
Honda’s product brochures and TV commercials fell short of the extensive and long-term fraudulent advertising campaign that might support a presumption in the eyes of some courts.  Even if Honda allegedly might have been more elaborate and diligent in disclosing the limitations of the CMB system, its advertising materials did not deny that limitations exist. A presumption of reliance does not arise when class members were exposed to quite disparate information from various representatives of the defendant.  California courts have not allowed a consumer who was never exposed to an alleged false or misleading advertising campaign to recover damages under California’s UCL.  

Class Certification Denied in Printer Litigation

A federal court recently denied class certification in a case brought on behalf of consumers accusing Epson America Inc. of misrepresenting how its NX series of printers functioned with ink cartridges. Christopher O’Shea et al. v. Epson America Inc. et al., No. 09-cv-08063 C.D. Cal.). Readers may recall our post that the court earlier dismissed many of the plaintiffs' claims on the basis that a manufacturer is not required under consumer protection laws to denigrate its own product and broadcast that its product may not perform as well as its competition.

In May 2009, plaintiff Rogers purchased a “Stylus NX 200” inkjet printer manufactured by defendants. Her decision to purchase this printer was allegedly based, in part, on a statement on the printer box that read: “Replace only the color you need with individual ink cartridges.”  Plaintiff allegedly understood this statement to mean that the printer would only require a black cartridge to print black text. In actuality, plaintiff alleged, the Epson NX 200 printer requires all cartridges to function. She subsequently filed suit against Epson claiming that Epson failed to disclose and affirmatively misrepresented the features of the printer.

Plaintiff  moved for class certification.  The interesting part of the court's analysis relates to the predominance issue under Rule 23(b)(3). Even though individualized questions of reliance and materiality were diminished under some of the plaintiff's theories because the consumer fraud claims are governed by the “reasonable consumer” test, which requires plaintiff to show that members of the public are likely to be deceived, Williams v. Gerber Products Co., 523 F.3d 934, 938 (9th Cir. 2008), the notions of reliance and injury still impacted class certification. Specifically, the court was not convinced that members of the putative class had standing to pursue their claims in federal court. To have standing under Article III, a plaintiff must present an injury that is concrete, particularized, and actual or imminent; fairly traceable to the defendant’s challenged action; and redressable by a favorable ruling.

In the context of Rule 23(b)(3), questions of Article III standing amount to an inquiry as to whether individual issues of injury-in-fact and causation predominate over common issues. While case law suggested that absent class members need not establish standing under the requirements of California’s consumer laws, there is a distinct requirement of Article III standing in federal court.  Statutory interpretations cannot permit a federal class action to proceed where class members lack Article III standing.  The requirement that all members of the class have Article III standing makes sense. If that were not the rule, a class could include members who could not themselves bring suit to recover, thus permitting a windfall to those class members and allowing Rule 23 to enlarge substantive rights.  The court therefore held that absent class members must satisfy the requirements of Article III.

Satisfaction of Article III’s requirements in turn raised individualized issues that defeated certification under Rule 23(b)(3) in this case. Article III requires some showing of injury and causation for a plaintiff to recover. Even if the alleged failure to disseminate truthful information about the product  would be subject to common proof, whether each class member was entitled to recover was not susceptible to proof on a class-wide basis because, to establish standing under Article III, each class member was required to show that they suffered some injury as a result of using or buying the product. Plaintiff therefore must show that all persons in the United States who purchased an Epson NX series printer during the class period suffered an injury which was caused by Epson’s alleged misrepresentation, and which was likely to be redressed by a decision in plaintiff’s favor. The record contained evidence indicating that the injury purportedly suffered by some members of the putative class could not fairly be traced to Epson’s allegedly deceptive representation.  Those individuals who purchased printers from certain third-party on-line sources, such as Amazon.com, were not exposed to the allegedly deceptive representation before they purchased their printers. Not all consumers who purchased an NX200 printer bought it at a retail store. Nor could standing be established by plaintiff’s (unsupported) assertion that the misrepresentation was on every box of the subclass, since some individuals purchased class printers without ever having been exposed to the allegedly deceptive representation. The fact that these individuals may have subsequently seen the misrepresentation when the package arrived in the mail was beside the point. There cannot be a causal connection between the consumer’s injury (the money spent on the printer) and Epson’s alleged misconduct (the purportedly deceptive advertising) because these consumers purchased the printers without ever seeing the purported misrepresentation.

Based on the foregoing, the court found that individualized issues of injury and causation permeated the class claims.The proposed class failed to satisfy Rule 23(b)(3)’s requirement that common issues predominate.

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State High Court Issues Consumer Fraud Act Decision

One of the dangers for defendants of claims based on state consumer fraud acts is the reluctance of some state courts to recognize the reliance and causation elements inherent in most such statutes.  The absence of a reliance element allows plaintiffs to argue that such claims are more amenable to class treatment, removing a significant individual element.  West Virginia's high court recently confirmed, however, that plaintiffs alleging affirmative misrepresentation claims under West Virginia's consumer protection law must show actual reliance on the allegedly misleading statement. White v. Wyeth, No. 35296 (W. Va., 12/17/10).
 

The underlying consumer fraud suit was filed pursuant to the WV Consumer Protection Act by purchasers of prescription hormone replacement therapy (“HRT”) drugs.  Plaintiffs alleged that the defendants used unfair and deceptive practices in promoting HRT prescription drug products to doctors and patients for treatment of serious menopausal disorders by allegedly using misleading statements in advertising, marketing and labeling.  Following completion of class certification discovery, defendant Wyeth filed alternative motions for dismissal or summary judgment, arguing that plaintiffs could not establish that they had standing to sue because they failed to meet their burden of showing a causal connection between their individual claims of injury and any alleged unfair or deceptive conduct attributed to Wyeth.

Defendant Wyeth particularly noted the lack of evidence demonstrating that plaintiffs decided to purchase HRT drugs because of anything they learned from Wyeth, or that their treating physicians considered information from Wyeth when they issued the prescriptions for HRT drugs. Plaintiffs responded that the statutory language only requires that they prove causation by alleging that Wyeth engaged in deceptive practices and that Respondents were harmed. They maintained that reliance on deceptive statements or practices need not be demonstrated.  In essence, plaintiffs read out of the WVCCPA the requirement that they “suffered ascertainable loss”  as a "result of” various unfair and deceptive acts of Wyeth. W. Va. Code § 46A-6-106(a).  Wyeth argued that the “as a result of” language contained in the statute requires plaintiffs to allege that they relied, or their doctors relied, on Wyeth’s allegedly deceptive actions when they made the decision to purchase hormone replacement therapy -- the phrase “as of result of” has to be read to mean that a plaintiff relied on the improper act or practice alleged in order to satisfy standing requirements.  Plaintiffs, in turn, argued that if the plaintiffs received drugs that were different from or inferior to that which they were entitled to receive, they did not receive the benefit of their bargain, and they therefore suffered an ascertainable loss.

The court noted that the private cause of action provisions of twenty-eight states' consumer fraud acts contain the “as a result of” language.  Many of the decisions addressing the issue of reliance in the context of private consumer protection causes of action show courts struggling to arrive at a way to be faithful to the purposes of consumer protection statutes – promoting fair and honest business practices and protecting consumers – without inviting nuisance lawsuits which impede commerce. In determining the meaning of the phrase “as a result of” in the WVCCPA, the court agreed with those decisions requiring proof of a causal nexus between the deceptive conduct giving rise to the private cause of action and the ascertainable loss, and the conclusion that this may require proof of reliance in some but not all instances.  The court found that reliance and causation are twin concepts, "often intertwined, but not identical."

Following this reasoning, when consumers allege that a purchase was made because of an express or affirmative misrepresentation, the causal connection between the deceptive conduct and the loss would necessarily include proof of reliance on those overt representations. Where concealment or omission is alleged, and proving reliance is an impossibility, the causal connection between the deceptive act and the ascertainable loss is established by presentation of facts showing that the deceptive conduct was the proximate cause of the loss. In other words, the facts have to establish that “but for” the deceptive conduct or practice a reasonable consumer would not have purchased the product and incurred the ascertainable loss. 

The court determined that this approach best serves the WVCCPA’s dual purpose of protecting the consumer while promoting “fair and honest competition.” W. Va. Code § 46A-6-101. Thus, a private cause of action under the provisions of West Virginia Code § 46A-6-106(a) of the West Virginia Consumer Credit and Protection Act must allege: (1) unlawful conduct by a seller; (2) an ascertainable loss on the part of the consumer; and (3) proof of a causal connection between the alleged unlawful conduct and the consumer’s ascertainable loss. Where the deceptive conduct or practice alleged involves affirmative misrepresentations, reliance on such misrepresentations must be proven in order to satisfy the requisite causal connection

The court went on to address an important second issue, finding that prescription drug cases are not the type of private causes of action contemplated under the terms and purposes of the WVCCPA.  The consumer cannot and does not decide what product to purchase. The intervention by a physician in the decision-making process necessitated by his or her exercise of judgment whether or not to prescribe a particular medication protects consumers in ways respecting efficacy that are lacking in advertising campaigns for other products. Accordingly, the court found that the private cause of action afforded consumers under West Virginia Code § 46A-6-106(a) does not extend to prescription drug purchases. See also New Jersey Citizen Action v. Schering-Plough Corp., 842 A.2d 174 (N.J. Super. 2003). , in which a New Jersey appeals court emphasized the difference between the pharmaceutical industry and other companies. According to the West Virginia court, the New Jersey court noted that physician intervention in prescribing decisions protects consumers and observed that the high degree of federal regulation of prescription drug products “attenuates the effect product marketing has on a consumer's prescriptive drug purchasing decision.”
The court remanded for dismissal.
 

Federal Appeals Court Vacates Third Party Payor Class Certification

A federal appeals court last week reversed an order by a district court certifying a class action of insurers, labor unions, and pension funds who alleged that they overpaid for a drug when the manufacturer allegedly didn't reveal all of the drug's adverse side effects. UFCW Local 1776, et al. v. Eli Lilly & Co., No. 09-0222 (2d Cir. 9/10/10).

Plaintiffs acted as third-party payors (TPP) who underwrite the purchase of prescription drugs by their members or insureds; they brought a putative class action against Eli Lilly, manufacturer of the drug Zyprexa, alleging that Lilly had misrepresented Zyprexa’s efficacy and side effects to physicians. The putative class alleged they paid for the many Zyprexa prescriptions. Plaintiffs argued that they were injured in two ways: first, by paying for Zyprexa prescriptions that would not have been issued but for the alleged misrepresentations; and second, by paying a higher price for Zyprexa than would have been charged, absent the alleged misrepresentations.

In a nearly 300-page opinion issued in  2008, Judge Jack Weinstein of the Eastern District of New York granted class certification to the third-party payors. Specifically, the district court certified a class of TPPs on RICO claims predicated on the overpricing theory of damages, but refused to certify a class related to state consumer protection law claims. The lower court concluded that the proposed TPP class presented common questions of law and fact because the “only difference among class third-party payors is how much of the total overcharge each shall receive in damages.” The lower court  had  addressed whether the losses suffered by the class could be established with sufficient precision, a huge issue in these kinds of cases, concluding that damages could be estimated based on the difference between what was paid for Zyprexa and the actual value of the product. The computation would supposedly require: (i) estimating the total out-of-pocket expenditures for the class members and (ii) using "well-accepted  techniques" in applied economics to determine the actual value or appropriate launch price of Zyprexa.

The district court also found that reliance could be proven for the class simply because the alleged fraud was “directed through mailings and otherwise at doctors who relied, causing damages in overpayments by plaintiffs.” This reliance, the district court concluded, could appropriately be shown by generalized proof, but without resort to the “fraud on the market” theory rejected in cases like McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir. 2008).

Defendant appealed.  The Second Circuit noted that to determine whether the proposed TPP class was properly certified, it had to consider whether substantial elements of the claim against Lilly may be established by generalized, rather than individualized, proof.  (Predominance of common or individual issues under Rule 23(b) was the focus.)  Even if the issue whether an act of marketing of the drug was in violation of RICO is considered common, Lilly disputed that the other elements required to recover damages – proof of an injury and proof that such injury was by reason of the RICO violation – were common to the proposed class.  To show injury by reason of a RICO violation, a plaintiff must demonstrate that the violation caused his injury in two senses. First, he must show that the RICO violation was the proximate cause of his injury, meaning there was a direct relationship between the plaintiff’s injury and the defendant’s injurious conduct. Second, he must show that the RICO violation was the but-for (or transactional) cause of his injury, meaning that but for the RICO violation, he would not have been injured.

Traditionally, to show causation in a fraud context, reliance needed to be shown. But in Bridge v.
Phoenix Bond & Indemnity Co
., 128 S. Ct. 2131, 2134 (2008), the Court lessened the emphasis on traditional reliance as an element of the RICO fraud claim to show causation in some cases.  But how a plaintiff can or must prove causation is bound up in what the factual claim is. The Bridge Court also said that in “most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation.” 128 S.Ct. at 2144.  Here, while reliance may not be an element of the cause of action, there was no question that the plaintiffs alleged, and thus had to prove, third-party reliance as part of their factual chain of causation.  Plaintiffs alleged an injury that was caused by physicians relying on Lilly’s supposed misrepresentations and prescribing Zyprexa accordingly. Because reliance was a necessary part of the factual causation theory advanced by the plaintiffs, they had to show it to prevail, and show it by generalized proof if they wished to proceed in a class action.

The court of appeals concluded that plaintiffs’ excess price theory was not susceptible to generalized proof with respect to either but-for or proximate causation, and therefore class certification based on this theory was an abuse of discretion.

The evidence in the record made clear that prescribing doctors do not generally consider the price of a medication when deciding what to prescribe for an individual patient. Any reliance by doctors on alleged misrepresentations as to the efficacy and side effects of a drug, therefore, was not a but-for cause of the price that TPPs ultimately paid for each prescription.  Moreover, the TPP plaintiffs, who unlike the doctors were in a position to negotiate the prices of drugs in their formularies, were unable to show proximate causation.  The TPP plaintiffs drew an alleged chain of causation in which Lilly distributed misinformation about Zyprexa, physicians relied upon that misinformation and prescribed Zyprexa for their patients, and then the TPPs overpaid.  But this narrative skipped several crucial steps: after the doctors prescribe the drug, TPPs relying on the advice of Pharmacy Benefit Managers and their Pharmacy and Therapeutics Committees, placed Zyprexa on their formularies as approved drugs, and then TPPs failed to negotiate the price of Zyprexa below the level set by Lilly.  Thus, in this case, the conduct directly causing the harm was distinct from the conduct giving rise to the fraud. The plaintiff TPPs could not and did not allege that they themselves relied on Lilly’s alleged misrepresentations. But because only the TPPs were in a position to negotiate the price paid for Zyprexa, the only factual reliance that might show proximate causation with respect to price was reliance by the TPPs, not reliance by the doctors.

Since plaintiffs could not show the entire factual causal chain by generalized proof, individual issues would abound, and class certification was improper. The court of appeals also remanded for reconsideration of defendant's summary judgment motion in light of its ruling.

 

Class Certification Denied in Microwave Popcorn Litigation

A federal court has denied class certification in a proposed consumer fraud class action arising from the sale of microwave popcorn with artificial butter flavoring. See Courtney Fine v. Conagra Foods, Inc., No. CV 10-01848 SJO (C.D. Calif., Aug. 27, 2010).

The facts: Diacetyl is a naturally occurring chemical in butter, and was also used in artificial butter flavors for decades. In 2007 defendant Conagra, maker of microwave popcorn, issued a press release to the public stating it was no longer adding the compound diacetyl, which has been associated with lung injury in factory workers exposed to high doses, to its butter-flavored microwave popcorn products. Since the announcement, defendant "reformulated" all butter-flavored varieties of Orville Redenbacher's and Act II microwave popcorn in response, it said, to consumer uncertainty regarding the ingredients of the microwave popcorn. Conagra also redesigned the packaging for these products to display the words "No Added Diacetyl."

Plaintiff alleged that she understood the advertising claim to be there was no diacetyl in the new popcorn, as opposed to no added diacetyl, and alleged she relied on defendant's claims that there was "no diacetyl" in the popcorn products when making the purchases. Plaintiff asserted, however, that diacetyl is still present in the products (as part of natural butter). Plaintiff further asserted that had she known the representation regarding the diacetyl was false, she would not have made the purchases.

Plaintiff alleged causes of action for: (1) false and misleading representation of material facts, constituting unfair competition within the meaning of California Business & Professions Code §§ 17200, et seq. ("UCL"); and (2) false advertising in violation of Business & Professions Code §§ 17500, et seq. ("FAL"). She further alleged that she suffered a monetary loss as a result of defendant's alleged actions, which were in violation of the Consumer Legal Remedies Act ("CLRA"), Cal. Civ. Code §§ 1750, et seq.

Last March, Conagra removed the case from state court to federal (Judge Otero). Then they filed a Motion to Dismiss based on various grounds, including that: (1) Plaintiff does not allege a cognizable injury resulting from defendant's products and therefore lacks standing; (2) Plaintiff fails to state a claim under the UCL, FAL, and CLRA as a matter of law under Rule 12(b)(6). The gist of the final argument was that plaintiff "received exactly what she paid for."  But, the court was persuaded that plaintiff adequately asserted that she did not get what she paid for, as she was under the impression that defendant's popcorn products were free of diacetyl. That is, she asserted that Conagra’s placement of "No Diacetyl Added" on the packaging is a material misrepresentation, and that reasonable consumers could (somehow) have taken the label to mean that diacetyl did not exist in the product at all.

Plaintiffs then moved for certification of a class consisting of all persons residing in the state of California who purchased Orville Redenbacher's brand Light Butter, Movie Theater Butter Light microwave popcorn, and/or ACT II brand 94% Fat Free Butter, Light Butter, and Butter Lover's microwave popcorn for personal use and not for resale since September 1, 2007. Plaintiff sought certification under Rule 23(b)(3) and 23(b)(2), but argued her "primary goal is to obtain injunctive relief by way of an order enjoining Defendant from its continued practice of making misleading advertising and label claims about its butter flavored microwave popcorn products."

The court denied the motion for class certification on three related grounds. The first problem was that in the court's prior Order Denying Defendant's Motion to Dismiss (6/29/10), the court had ruled that plaintiff established standing for herself because she alleged that she incurred injury as a result of defendant's allegedly improper conduct. That is, plaintiff's spending money on defendant's popcorn in reliance of defendant's placing "No Added Diacetyl" on the packaging.

In the class Motion, plaintiff sought to certify a class that includes "all persons residing in the State of California who purchased [Defendant's] popcorn for personal use and not for resale since September 1, 2007."  Named plaintiff made no mention of the proposed class being comprised only of members who made the purchase as a result of defendant's allegedly false statements, which would be necessary in order to establish standing for the rest of the class.  The court noted that other courts have held that class definitions should be tailored to exclude putative class members who lack standing; each class member need not submit evidence of personal standing but, nonetheless, a class must be defined in such a way that anyone within it would have standing. Burdick v. Union Sec. Ins. Co., 2009 WL 4798873, at *4 (C.D. Cal. 2009).

Accordingly, class certification was improper here, given that plaintiff's proposed class included many people who may not have relied on defendant's alleged misrepresentations when making their purchasing decisions.

Second, a related problem was the Rule 23(a) requirement that plaintiff’s claims be typical of the class claims. The court agreed with Conagra that plaintiff failed to adduce facts suggesting that other class members have been injured by the same course of conduct that she asserts injured her. There could be no serious question, said the court, that the vast majority of putative class members here never read (let alone considered) the defendant's statement at issue, do not know what diacetyl is, and did not base their popcorn purchases on diacetyl-related issues. Plaintiff purchased popcorn, she said, because of defendant's allegedly misleading statements regarding diacetyl. Plaintiff's injury was established due to her alleged reliance on defendant's statements. But plaintiff sought to certify a class that would likely include people with varying rationales behind their purchases – many who purchased popcorn based on factors like flavor or brand. Plaintiff thus failed to establish that she could be a typical representative of the class, whose members were buying for all sorts of reasons unrelated to diacetyl.

Third, because the court found that plaintiff was not a typical representative, the court also held that plaintiff was not an adequate representative under Rule 23(a)(4).

What is refreshing about this short opinion is the recognition that Rule 23(a) matters too.  Often we see courts giver very cursory analysis of the (a) elements and/or emphasize that regardless of the initial prerequisites the issues of predominance, manageability and superiority dictate the certification result.  While the fact that class members undoubtedly bought microwave popcorn for many reasons would impact predominance of individual issues, it also does in fact suggest that the class representative's claims were not typical of the the class, as defined.

(NB. Your humble blogger is involved in the diacetyl litigation, but not this case.)

 

Consumer Class Certification Denied -- Again

An up and down class action proceeding involving Listerine has taken a new turn. Pfizer Inc. v. Superior Court of Los Angeles County, No.B188106 (Cal. App. 3/2/10).

Plaintiffs brought a proposed class action on behalf of California consumers who allegedly purchased Listerine on the claim that the mouthwash prevented plaque and gingivitis as effectively as dental floss, relying on the state's Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.) and the False Advertising Law (FAL) (§ 17500 et seq.).  The trial court certified a California class consisting of all individuals who purchased Listerine between June, 2004 and January, 2005.  The appeals court initially ruled in 2006 that the trial court’s certification was overbroad, relying on Proposition 64 which amended standing requirements in such actions and requires proof that the proposed class suffered injury.  Following the decertification order, however, the California Supreme Court ordered the appeals court to revisit the issue in light of its intervening decision in In re: Tobacco II, 46 Cal.4th 298 (2009). 


Upon remand, the court of appeals vacated the prior opinion, received supplemental briefs from the
parties and amici curiae, and reconsidered. Upon reflection, the appeals court concluded that the circumstances of the case still did not warrant class certification.

The court noted that the causation requirement for purposes of establishing standing under the UCL, and in particular the meaning of the phrase "as a result of" in section 17204, holds that a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions. Those same principles, the state supreme court had said Tobacco II in an amazingly result-driven fashion, do not require the class representative to plead or prove with an "unrealistic degree of specificity" that the plaintiff relied on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign. But Tobacco II does not stand for the proposition that a consumer who was never exposed to an alleged false or misleading advertising or promotional campaign is entitled to restitution.

The certified class, consisting of all purchasers of Listerine in California, was overbroad because it presumed there was a class-wide injury. However, the record reflected that of 34 different Listerine mouthwash bottles on sale, 19 never included any label that made any statement comparing Listerine mouthwash to floss. Further, even as to those flavors and sizes of Listerine mouthwash bottles to which defendant did affix the labels which were at issue, not every bottle shipped between in the class period bore such a label. Also, although Pfizer allegedly ran four different television commercials with the “as effective as floss” campaign, the commercials did not run continuously and there is no evidence that a majority of Listerine consumers viewed any of those commercials. Thus, many, perhaps the majority of, class members who purchased Listerine during the pertinent period did so not because of any exposure to any allegedly deceptive conduct, but rather, because they were brand-loyal customers or for other reasons. As to such consumers, there is absolutely no likelihood they were deceived by the alleged false or misleading advertising or promotional campaign. Such persons cannot meet the standard of having money restored to them because it “may have been acquired by means of” the unfair practice.

Finally, plaintiff testified he did not make his purchase based on any of the four television commercials or other ads, and that he bought Listerine due to the bottle’s red label (which differed from the other labels), which he recalled said “as effective as floss.”  Because the various commercials and labels contained different language, with some even expressly advising consumers to continue flossing, his testimony as to his reaction to the Listerine label is not probative of his, or absent class members’, reaction to different language contained in television commercials and other labels. Therefore, named plaintiff lacked standing to assert a UCL claim based on those television commercials or other labels.

 

 


 

Two Consumer Fraud Class Actions Offer Contrast

Two recent consumer fraud class actions offer contrasting lessons.  First, the federal court declined to certify a class of Ford Motor Co. truck owners who alleged the vehicles are prone to a shimmying problem. Lewis v. Ford Motor Co., 2009 WL 2750352 (W.D. Pa. 8/25/09).

According to Plaintiffs, their vehicles were subject to front-end suspension defects which caused severe oscillation under ordinary driving conditions and allegedly created a safety hazard for the drivers of the vehicles as well as other motorists. Pennsylvania residents Timothy Lewis and Timothy Trapuzzano sued Ford on behalf of a statewide class of owners of 2005–2007 model year F-250 and F-350 trucks.  Plaintiffs moved seeking class certification as to Count III of their Complaint, the alleged violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.  The court noted that the 3rd Circuit has recently re-evaluated the standard of review to be applied by a district court in considering a motion for class certification. First, the district court must consider carefully all relevant evidence and make a definitive determination that the requirements of Rule 23 have been met before certifying a class;  that is, it is no longer sufficient for a party to assure the court that it intends or plans to meet the requirements. Second, the decision to certify a class requires rigorous consideration of all the evidence and argu-ments offered by the parties.  This may require the court to resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits -- including disputes touching on elements of the cause of action.  Finally, weighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands. In other words, to certify a class the district court must find that the evidence more likely than not establishes each fact necessary to meet the requirements of Rule 23. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir.2008.)

Originally, plaintiffs alleged the defendant failed to comply with the terms of a written guarantee or warranty given to the buyer at, prior to or after a contract for the purchase of goods or services.  But at the motion stage, instead, plaintiffs relied on the so-called “catch-all” provision, which broadl includes “unfair methods of competition” or “unfair or deceptive acts or practices” to include “engaging in any other fraudulent or deceptive conduct."   This switch may have been done to avoid the argument that plaintiffs need to prove relaince -- an indivdualized inquiry that can impede certification.  The court consluded, based on the almost universal agreement of the district courts of the 3rd Circuit, that a plaintiff must allege and show justifiable reliance even for claims brought under the catch-all provision of the state's Consumer Protection Act.

The reliance element was individual, and interestingly, the court noted that this affected the 23(a) issue of commonality as well as the 23(b) issue of predominance. Next, plaintiffs argued that while there may be some individual differences in the amount of damages, such discrepancies were not sufficient to defeat class certification. However, the court noted, they failed to recognize that the threshold questions do not concern the amount of the individual damages but whether or not the individual injury occurred. Proof of injury or fact of injury (whether or not an injury occurred at all) must be distinguished from calculation of damages (which determines the actual value of the injury. 

If proof of the essential elements of the cause of action requires individual treatment, then class certification is unsuitable. Here, each class member would have to show not only justifiable reliance but also loss as a result of that reliance, aspects subject to individual, rather than common questions of law or fact. This lack of commonality rendered this case unsuitable for class treatment.  And it logically followed that if plaintiffs failed to satisfy the criteria for showing commonality, they cannot satisfy the more strenuous demands of the predominance analysis.

Shortly thereafter, the 9th Circuit handed down a decision announcing a standard of review for legal issues related to certification orders, and overruled a district court's denial of class certification in a consumer fraud class action.  Yokoyama v. Midland Nat'l Life Ins. Co., 2009 WL 2634770
(9th Cir.  8/28/09).

Three consumer senior citizens, all residents of Hawaii, alleged that they had purchased Midland's annuities from an independent broker. Plaintiffs alleged that the the annuities were marketed through deceptive practices, in violation of Hawaii's Deceptive Practices Act. The district court held that the plaintiffs could not satisfy Federal Rule of Civil Procedure 23's requirements that common issues predominate over individual issues and that a class action is a superior method of adjudication.

The dispositive issue on appeal was whether the Hawaii Act requires a showing of individualized reliance.  But there was a debate over the standard of review.  WHile certification decisions generally were reviewed under an abuse of discretion standard, the 9th Circuit panel agreed with the Seventh Circuit's explanation of the appropriate standard of review. Andrews v. Chevy Chase Bank, 545 F.3d 570, 573 (7th Cir.2008).  That is, the underlying rulings on issues of law must be reviewed de novo even when they are made in the course of determining whether or not to certify a class. We generally review a grant of class certification for abuse of discretion, but purely legal determinations made in support of that decision are reviewed de novo. (Note that Judge Smith argued in his concurrence that Ninth Circuit precedent cannot be overturned by two judges, only en banc).

Hawaii courts have interpreted the word “deceptive” to include those acts that mislead consumers acting reasonably under the circumstances, observed the panel.   And a deceptive act or practice is  a representation, omission, or practice that is likely to mislead consumers acting reasonably under the circumstances.  The representation, omission, or practice is material if it is likely to affect a consumer's choice. Whether information is likely to affect a consumer's choice is an objective inquiry, turning on whether the act or omission is likely to mislead consumers as to information important to consumers in making a decision regarding the product or service.  Therefore, said the court, since Hawaii's consumer protection laws look to a reasonable consumer, not the particular consumer, inidivudal relaince is not an element. The fact-finder will focus on the standardized written materials given to all plaintiffs and determine whether those materials are likely to mislead consumers acting reasonably under the circumstances.

 

 


 

Consumer Fraud Class Action Rejected In Supplement Case

A putative class action of purchasers of the asserted mood enhancer and belly fat reducer Relacore was recently rejected by a New Jersey appeals court.  Lee v. Carter-Reed Co., 2009 WL 2475314 (N.J. Super. Ct. App. Div. 8/14/09).  The court affirmed a lower court's decision not to certify the class action, in which plaintiffs had alleged that the defendant falsely advertised the benefits of the product.

Plaintiff Melissa Lee alleged she purchased Relacore, manufactured and distributed by Carter-Reed Co., and asserted that she purchased the product based on the promise that it would reduce belly fat. But, she averred, she actually gained belly weight during the time she took the product.  She claims that defendant's advertising campaigns touted that Relacore helps reduce stress-induced belly fat. Lee claimed that the defendant devised and utilized a fraudulent, deceptive advertising campaign for Relacore. She sought relief under the New Jersey Consumer Fraud Act, and related common law fraud theories.

Following discovery limited to class suitability, plaintiff moved for class certification. Defendants opposed the motion. Following oral argument, the trial court denied the application for class certification, citing absence of superiority,  manageability, and predominance. In an unpublished per curiam opinion, the Superior Court affirmed and held that individual issues predominated over issues allegedly common to the class.

The court noted first that the superiority requirement requires an analysis that includes: (1) an informed consideration of alternative available methods of adjudication of each issue, (2) a comparison of the fairness to all whose interests may be involved between such alternative methods and a class action, and (3) a comparison of the efficiency of adjudication of each method. Manageability of the class is a consideration, as well, but it is “disfavored” in NJ to deny class certification on this basis alone. In order to justify denial of class certification on this basis, the management issues must be of great magnitude. 

Here, the issues of superioirty and of manageability were subordinate to the issue of predominance.  A party asserting a CFA claim in New Jersey must establish wrongful conduct, an ascertainable loss, and a causal relationship or nexus between the wrongful conduct and the loss. A common law fraud claim requires proof of  a material representation of a presently existing or past fact, made with knowledge of its falsity and with the intention that the other party rely thereon, resulting in reliance by that party to his detriment. 

In this case, the central issue for the consumer fraud claim was the existence of a causal nexus between the wrongful conduct and any loss.  Plaintiff asserts that she relied on a false marketing campaign and she was induced by the false representations to purchase and use the product. Neither plaintiff nor the court knew, however, what caused others to purchase and use the product. Neither plaintiff nor the court knew whether putative class members even saw the alleged print or Internet advertisements or whether they purchased the product due to a recommendation from a friend or family member or for some other reasons.

Moreover, the Relacore market campaign was multi-faceted. In some ads, it was touted as a belly fat retardant; in others, a mood elevator; in others, a stress reducer.  There was no way to know on a common basis the reason any putative class members purchased the product, even assuming they heard or saw any advertising. This distinguished the case from Varacallo v. Massachusetts Mutual Life Insurance Co., 332 N.J. Super. 31 (N.J. Super. Ct. App. Div. 2000), in which the court certified a class of those who purchased “vanishing premium” life insurance, and in which the advertising approach was uniform and common to all class members.

The lack of predominance was even more obvious in the context of plaintiff's common law fraud claim. For this claim, the putative class must prove reliance -- which they could not on a common basis.

The case is useful as it analyzes establishing a causal nexus between the challenged conduct and an ascertainable loss.  Properly viewed, that causal link ought to be a major impediment to class certification because it requires individualized factual determinations for absent class members. Plaintiff's argument to extend Varacallo to false advertising product cases brought forth numerous opposing amici, including PLAC.


 

Third Circuit Vacates Class Certification In Consumer Fraud Tanning Case

MassTortDefense has posted about the dangers lurking in consumer fraud class actions before. About a year ago, we posted on a disturbing decision in Nafar v. Hollywood Tanning Systems, Inc., 2008 WL 3821776 (D.N.J., August 11, 2008), where the district court certified a nationwide class of tanning customers.  We concluded our post, by noting "Clearly, this certification decision ought to be reviewed by the Third Circuit."  Fortunately, that has happened. The Third Circuit granted Hollywood Tans’ petition for interlocutory review under Fed. R. Civ. P. 23(f), and has vacated the class certification decision. Nafar v. Hollywood Tanning Systems, Inc., No. 08-3994 (3d Cir. Aug. 5, 2009).

Plaintiff had alleged she purchased monthly tanning memberships from defendant Hollywood Tanning Systems, in New Jersey. Plaintiff alleged that defendant fraudulently failed to disclose the fact that any exposure to ultraviolet rays (UV rays) increases the risk of cancer and allegedly deceptively failed to warn consumers about the dangers of indoor tanning. While plaintiff acknowledged that defendant's machines may block out most UVB rays, she contended that defendant failed to inform consumers that UVA rays, also emitted by its machines, are allegedly linked to skin cancer. Plaintiff instituted suit alleging: (1) violation of the New Jersey Consumer Fraud Act (“NJCFA”), (2) fraud, (3) unjust enrichment, and (4) breach of warranty.

Plaintiff sought a nationwide class of consumers who had purchased tanning memberships. The district court’s analysis of the Rule 23(b) requirements for class certification was, unfortunately, devoid of substance. The 3d Circuit determined that the district court erred by not defining either the class or the class claims, as required by Rule 23(c);  erred by failing to conduct an adequate choice-of-law analysis when the potential class members for this consumer fraud action hail from numerous states; erred by failing to consider evidence suggesting that individual issues of fact and law regarding causation predominate over common issues, and finally, erred in failing to consider whether res judicata would apply to potential personal injury claims, and therefore whether Nafar was an “adequate representative” of the class.

In the context of class action certification, the Supreme Court has stated that a district court “may not take a transaction with little or no relationship to the forum and apply the law of the forum in order to satisfy the procedural requirement that there be a ‘common question of law.’" Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 821 (1985). A court must apply an individualized choice of law analysis to each plaintiff’s claims. Here, the district court had stated that common issues of law predominated: “Common questions of law predominate because New Jersey law is central to this litigation. The NJCFA [consumer fraud act] will apply to all class members because this particular law governs Defendant's behavior and uniform policies. New Jersey has a strong interest in this litigation because the case's outcome will likely affect Defendant's nationwide behavior…. Indeed, the NJCFA is one of this nation's strongest consumer protection laws and its application will not frustrate other states' consumer protection laws. ” That conclusion was not based on an analysis of the choice of law rules of the forum state; cited no state court cases suggesting that NJ law should apply to the claims of consumer from other states; failed to analyze the differences among the consumer protection laws of the various states; and failed to analyze the interests other states may have in applying their laws by simply assuming every state would rather apply NJ’s law.

The 3d Circuit noted that New Jersey now applies the Second Restatement’s “most significant relationship” test. On remand, the District Court was ordered to conduct a choice of law analysis under New Jersey’s most significant relationship test.

The trial court had stated that common fact issues predominated as well because the alleged misrepresentations and omissions concerning the negative consequences related to indoor tanning are alleged to be uniform. However, the court failed to conduct any analysis of the elements of the claims upon which the class was certified, and whether any of the elements might raise individual questions. In addition to the analysis that will be necessitated by a proper choice of law review, the 3d Circuit noted that evidence of plaintiffs’ conduct relevant to the causation issue cannot be ignored without comment in a predominance analysis. This is because the Supreme Court of New Jersey has held that individual issues regarding plaintiff’s behavior may, in certain cases, defeat predominance in a NJCFA class action, despite the alleged uniformity of a defendant’s misrepresentations or omissions.

As we noted last year about the certification decision, the defendant apparently submitted surveys showing that the risks of tanning are common knowledge, and many consumers understood the cancer risks involved. Even if plaintiffs were not required to present any direct proof of individual reliance – which they would be under some state laws – this would not prevent a defendant from presenting direct evidence that an individual plaintiff did not rely on any representations from the company. Defendants have a right to present evidence negating a plaintiff's direct or circumstantial showing of causation and/or reliance. The "predominance" inquiry here thus resembled a mere commonality test. On remand, the 3d Circuit held, the court should consider the evidence presented, resolve any disputes relevant to the predominance issue, and consider all the elements of the underlying claims to determine if individual issues predominate over common issues of fact and law.

Finally, named plaintiff had only economic injuries, but personal injury claims were ostensibly included in the class definition.  This raised the issue of claim splitting and res judicata, and the issue whether the named plaintiff could be an adequate class representative for a class alleging such disparate injuries.  The appeals court found that  the district court failed to consider this very important issue in assessing the adequacy of representation requirement. For that reason the court was told it should consider, on remand, New Jersey’s doctrines regarding preclusion, whether other states’ preclusion doctrines would apply, the specific claims and facts alleged here, and whether any potential future claims by class members with personal injury would be at risk of being barred by res judicata.

We will see what happens on remand, but for now, scary decision vacated.

Second Circuit to Hear Appeal of Class Certification Decision in Zyprexa RICO Case

The U.S. Court of Appeals for the Second Circuit recently agreed to hear Eli Lilly’s appeal of a federal district court's orders granting class certification and denying summary judgment in litigation over its anti-psychotic medication, Zyprexa. See In re Zyprexa Products Liability Litigation, 08-4685-mv (2d Cir. 1/15/09).

Judge Jack B. Weinstein of the the Eastern District of New York had granted class certification last fall to a group of third-party payers, including insurance companies, who were suing Eli Lilly for alleged overpayment after the company allegedly exaggerated the benefits of the drug and supposedly failed to disclose certain side effects. The 2d Circuit has now granted the 23(f) motion for leave to appeal.

Readers of MassTortDefense may recall that the 2d Circuit just last year in McLaughlin v. American Tobacco Co., 522 F.3d 215 (2d Cir. 2008), overruled Judge Weinstein's certification of a class of “light” cigarette smokers, finding that individualized issues regarding reliance, loss causation, damages and injury all precluded a finding that common issues predominated over individualized ones as required by Federal Rule of Civil Procedure 23(b)(3). The Zyprexa class claim was brought under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1964, as plaintiffs seek to take advantage of their reading of the U.S. Supreme Court’s ruling in Bridge v. Phoenix Bond & Indemnity Co., 128 S. Ct. 2131 (2008), regarding reliance in a RICO fraud claim.

In certifying the class in Zyprexa, Judge Weinstein applied his take on the reasoning in Bridge, finding that third-party payers had colorable claims based on the allegedly fraudulent statements made to and relied upon by doctors who prescribed the drugs (not parties). As warned of in our post here last year, the Supreme Court had appeared to reject the defense argument that the proximate cause requirement inherent in the “by reason of” language of the RICO statute demands that a civil RICO plaintiff asserting a claim based on fraud establish his reliance on a misrepresentation by the defendant. In the context of a civil RICO claim predicated on fraud, the required causal link demands a showing that the plaintiff relied on an alleged misrepresentation made to the plaintiff by the defendant. Otherwise, the causal relationship between the alleged injury and the alleged fraud is too attenuated.

The Court appeared to reject petitioners' arguments that under the “common-law meaning” rule, Congress should be presumed to have made reliance an element of a civil RICO claim predicated on a violation of the mail fraud statute. And rejected the argument that a plaintiff bringing a RICO claim based on mail fraud must show reliance on the defendant's misrepresentations in order to establish proximate cause. The Court felt it had no ability to respond to the policy argument that RICO should be interpreted to require first-party reliance for fraud-based claims in order to avoid the “overfederalization” of traditional state law claims. A RICO plaintiff who alleges injury by reason of a pattern of mail fraud cannot prevail without showing that someone relied on the defendant's misrepresentations. But that does not mean, under one reading of Bridge, that the only injuries proximately caused by the misrepresentation are those suffered by the recipient.

The Court’s decision on reliance was based on statutory interpretation, rather than logic or common sense. We predicted that the absence of a clear reliance requirement may in fact make this type of claim even more popular with mass tort plaintiffs. And we are seeing its potential effect on class certification decisions in some district courts.