Posts belonging to Category Caselaw Developments

The U.S. Supreme Court recently issued a ruling likely to influence the many motions for remand filed by prospective class action plaintiffs seeking, under the Class Action Fairness Act (CAFA), to have their cases sent back to state court due to an insufficient dollar amount in controversy to trigger federal jurisdiction. The opinion held that a pre-certification stipulation not to seek damages exceeding CAFA’s $5 million jurisdictional minimum ought to have been disregarded by the district court when it ruled on a plaintiff’s motion to remand. See The Standard Fire Ins. Co. v. Knowles, 568 U. S. ___ (2013) (slip opinion available here).

In Knowles, the plaintiff filed a class action in Arkansas state court alleging that Standard Fire underpaid homeowners’ insurance claims. The operative complaint confined the class definition to Arkansas residents and alleged only causes of action arising under Arkansas law. On that basis, the plaintiff stipulated that the class would seek less than $5 million in damages, and the Eighth Circuit found the stipulation binding and held that federal CAFA jurisdiction could not be exercised. Slip op. at 2.

In this, the Supreme Court’s first extended, substantial ruling on CAFA, the majority focused on whether such a stipulation could bind absent class members, and held that it could not. The Court reasoned that “[t]he stipulation Knowles proffered to the District Court . . . does not speak for those he purports to represent . . . because a plaintiff who files a proposed class action cannot legally bind members of the proposed class before the class is certified. See Smith v. Bayer Corp., 564 U. S. ___, ___ (2011).” Slip op. at 3-4.

Apart from the core holding that absent class members cannot be bound to a recovery cap stipulation, Knowles will also likely affect some of the case law typically cited in remand battles, in particular Lowdermilk v. United States Bank, N.A., 479 F.3d 994 (9th Cir. 2007). Plaintiffs seeking remand regularly cite Lowdermilk for the proposition that defendants removing under CAFA must establish the amount in controversy “to a legal certainty.” Although Lowdermilk is not expressly overruled in Knowles, leading plaintiffs’ counsel have observed that Lowdermilk might not be long for this world. Moreover, Knowles intimates that plaintiffs’ counsel ought to be circumspect in undertaking anything that purports to limit the potential recovery, as such a tactic could redound to a finding of inadequacy as to the named plaintiff. See slip op. at 5 (“[A] court might find that Knowles is an inadequate representative due to the artificial cap he purports to impose on the class’ recovery.”).

In contrast to other recent U.S. Supreme Court decisions deemed defeats by the plaintiffs’ bar, Knowles was a unanimous decision, with the opinion written by a stalwart of the Court’s four-member left-leaning bloc, Justice Stephen Breyer.

While the attack on class and other representative actions continues under the cover of advancing “the liberal policy favoring arbitration,” courts continue to articulate a sensible class action jurisprudence in response to mass wrongs where no particular victim has a rational incentive to seek an individual remedy. For instance, a Colorado federal court recently took up whether a defendant employer in a conditionally-certified FLSA action should be permitted to meet with prospective class members to discuss the pending allegations of unpaid wages during the employees’ class opt-in period. See Stransky v. HealthOne, No. 11-2888 (D. Colo. Mar. 7, 2013) (order granting motion for injunctive relief). The court held that the employer’s conduct was impermissible, and found this behavior to be “misleading, confusing, coercive and improper.” Order at 14.

In assessing whether the communications with the prospective class members were “misleading, confusing, or coercive,” the court gave primary emphasis to that portion of the defendant’s scripted message read to the employees pertaining to attorney’s fees: “If the court ultimately rules in plaintiffs’ favor, the attorneys at Bachus and Schanker will be entitled to fees for representing you and other members of the conditional class, which in this case will likely be deducted from any final award, should there be one.” Order at 11-12. On that basis, the court concluded that “Defendant’s statement that attorneys’ fees will likely be deducted from the final award unequivocally misrepresents the law and misleads Opt-in Plaintiffs into believing that if they prevail, their award will be significantly reduced to pay attorneys’ fees.” Order at 12.

The unusually potent, multi-part remedy for plaintiffs included: (1) a prohibition on the employer’s communications with prospective class members “about this case and the claims or defenses in this action until after the opt-in period has closed”; (2) a corrective notice, to be incorporated into the notice of conditional certification; and (3) the opportunity for the plaintiff to recover attorneys’ fees incurred in connection with moving against the prohibited communications. Order at 15-18.

Just over a year ago, the Second Circuit issued perhaps the strongest limitation on the U.S. Supreme Court’s ruling in Concepcion v. AT&T, invalidating a class action waiver contained in the arbitration agreement between American Express and the merchant plaintiffs. See In re American Express Merchants’ Litigation, 667 F.3d 204 (2nd Cir. 2012). The Second Circuit held the waiver of class treatment to be unenforceable because a prohibition against collective actions would impair the plaintiffs’ ability to enforce their statutory rights under federal antitrust law.

American Express’ cert petition was granted, however, throwing the Second Circuit holding into considerable doubt. After months of briefing, the Supreme Court oral argument was held on February 27th. Justice Ginsberg took the lead by questioning Michael Kellogg, an American Express lawyer, as to whether the class action waiver would operate just as the Second Circuit supposed, by making it impossible for individual plaintiffs to afford the experts necessary to establish a defendant’s monopoly power. See Transcript of Oral Argument at 3-5, American Express Co. v. Italian Colors Restaurant, No. 12-133 (February 27, 2013). Kellogg’s response focused on the Second Circuit’s ruling requiring a threshold class certification analysis: “The alternative, as the court below held, is that the district court has to decide in the first instance, I’m not going to send it to arbitration because I think they need a class action. To make that determination, he first has to do a Rule 23 analysis.” Transcript at 5. Unsatisfied, Ginsburg persisted, and Kellogg conceded that “there is no guarantee in the law that every claim has a procedural path to its effective vindication” (Transcript at 6), illuminating the fundamental difference in outlook between American Express and the Second Circuit on the key issue of effective access to legal remedies and whether an arbitration clause is enforceable under federal law if it inhibits the vindication of statutory rights.

Justice Kagan picked up the thread, asking Kellogg whether his client’s arbitration clause could candidly prohibit merchants from “bring[ing] any Sherman Act claim against American Express,” which Kellogg conceded it could not. See Transcript at 6-7. Kagan thus made vivid that American Express is purporting that it is permissible to accomplish indirectly — denial of an effective vindication of rights — what it cannot do directly. Justice Kagan then expounded on this argument, asking Kellogg whether a contract provision whereby American Express merchants were not permitted to adduce expert evidence of monopoly power in an antitrust suit would be permissible under existing Supreme Court precedents. See Transcript at 8-9. After initially contending that such a question would be better addressed under state unconscionability law, Kellogg responded “Correct” when Justice Kagan re-stated the same hypothetical. Transcript at 9. As Kellogg pontificated on the reasoning behind the Second Circuit decision, Justice Ginsberg interjected to note that the Second Circuit had based its ruling in part on the fact that a suitable antitrust expert would cost an individual plaintiff roughly $300,000, whereas even with an award of treble damages, the same individual plaintiff would be compensated with only $5,000, making such a case per se irrational without the cost spreading attendant to a class action. Transcript at 11.

Initially, at least, the justices likely to support upholding the Second Circuit decision were getting the better of the arguments. Perhaps sensing this, Justice Scalia intervened to note “I guess you could have said the same thing under the Sherman Act before Rule 23 existed, right?”, seemingly assuming that procedures equivalent to class actions were impossible before Rule 23’s modern incarnation in 1966. See Transcript at 12. In fact, class action-type procedures have existed in Anglo-American jurisprudence at least since the year 1200, with U.S. court decisions and equity rules antedating Rule 23 having approved of similar procedures that bind absent parties, according to one of the foremost experts in the area. See generally Stephen C. Yeazell, From Medieval Group Litigation to the Modern Class Action (Yale Univ. Press, 1987). Despite Scalia’s tenuous grasp of legal history, he pointed Kellogg toward perhaps his most compelling argument of the session: that on four different occasions Congress had considered adopting, and each time declined to adopt, class action procedures attendant to the Sherman Antitrust Act. See Transcript at 12.

Justice Kennedy, a frequent swing vote, briefly expressed skepticism about American Express’ argument. See Transcript at 14-15. However, Justice Stephen Breyer, who taught an introductory antitrust law course at Harvard Law School while he sat on the First Circuit, questioned the premise that an antitrust expert would necessarily be costly. See Transcript at 15-16. Breyer posited that an antitrust expert, like himself, could serve as the arbitrator, and in that capacity could streamline what would be extensive expert discovery in civil court, thereby capturing the efficiency and cost containment often cited as a motivating force behind the Federal Arbitration Act. See Transcript at 16. Similarly, Chief Justice Roberts elicited from Kellogg that there would be no bar to a law firm, trade association, or hedge fund financing the costs of an expert or other expense too prohibitive for an individual antitrust plaintiff. See Transcript at 20-21. Justice Kennedy appeared amenable to Breyer’s suggestion about the arbitrator also serving as a joint expert (see Transcript at 54-55), and only Justices Kagan and Ginsberg evinced a strong aversion to American Express’ arguments, suggesting that those hoping to preserve the Second Circuit’s decision have their work cut out for them.

For his part, Paul Clement, the lawyer for the plaintiffs below, focused his oral argument on the “vindication of rights doctrine,” arguing that the much-invoked strong federal policy favoring arbitration must yield where arbitration would effectively nullify a statutory right. See Transcript at 24-26. Additionally, Clement corrected Scalia’s earlier (and repeated) contention that there were no class actions before Rule 23. See Transcript at 25. However, much of Clement’s time was expended on relatively arcane exchanges with Justice Breyer, reminiscent of the discussions that arose when Breyer was a professor.

A decision from the Court is expected this summer.

Nestlé USA, Inc., facing allegations that its “Juicy Juice Brain Development” beverage deceived consumers into believing the product provided special cerebral health benefits, appeared to have dodged a class action when Judge George H. Wu granted its motion to dismiss in May of 2011, employing heightened and controversial pleading standards. See Chavez v. Nestlé USA, Inc., No. 09-9192, 2011 WL 2150128 (C.D. Cal. May 19, 2011). However, a three-judge Ninth Circuit panel recently reversed Wu’s ruling, holding that the plaintiffs’ “allegations regarding Juicy Juice Brain Development will support viable FAL and UCL fraudulent business practices claims,” concluding that the plaintiffs sufficiently alleged that Nestlé had not substantiated the benefit by scientific proof, and that a child would have to drink more than a quart a day of Juicy Juice to get the recommended daily allowance of DHA. Memorandum at 2, Chavez v. Nestlé, No 11-56066 (9th Cir. Mar. 8, 2013).

Though designated as unpublished, the ruling is notable not only in reviving what might prove to be a substantial consumer class action, but also in confirming that the Ninth Circuit remains reluctant to supplant the long-standing and familiar notice pleading standard articulated in the landmark Conley v. Gibson, 355 U.S. 41 (1957), with the heightened standards applied in Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (an antitrust case and a domestic terrorism case, respectively).

Only the dissent directly broaches the Twombly/Iqbal controversy. See Memo. at 4 (“They plead that the advertisements suggesting that the additives in Juicy Juice are good for children are ‘likely to deceive’ the public. Under Twombly and Iqbal, . . . more than that conclusory claim is necessary. The complaint does not suggest that anything in Juicy Juice is bad for children’s brain development, just that ‘the scientific evidence is mixed’ as to whether DHA (an omega-3 fatty acid, and one of the nutrients in fish oil capsules) is beneficial to children.”) (Kleinfeld, J., dissenting) (footnote omitted).

However, without acknowledging the controversy around Twombly and Iqbal, the majority engaged the permissive analysis commonly associated with motions on the pleadings, concluding that the plaintiffs “have adequately pled that ‘members of the public are likely to be deceived’ by the Juicy Juice Brain Development labeling and advertisements,” since their complaint, which “must be taken as true,” contains “the product name; the product labels and advertisements that induced Appellants’ reliance; and the allegation that the product actually contains very small amounts of the touted ingredient, DHA.” Memo. at 2.