Class Action Issues Update Fall 2017

The American Antitrust Institute (AAI) seeks to preserve the effectiveness of antitrust class actions as a central component of ensuring the vitality of private antitrust enforcement.[1] As part of its efforts, AAI issues periodic updates on developments in the courts and elsewhere that may affect this important device for protecting competition and consumers. This update covers developments since Spring 2017.

I. Proposed Legislation

In our March 2017 update, we provided a detailed review of the Fairness in Class Action Litigation Act of 2017, H.R. 985, which passed the House in a floor vote, 220-201. Fourteen Republicans and all House Democrats voted against the bill. AAI believes the bill would likely eviscerate consumer, antitrust, employment, and civil rights class actions.

On March 13, the bill was received in the Senate and referred to the Senate Judiciary Committee. As of this writing, no further action has been taken. The bill does not yet have a sponsor in the Senate. To overcome a filibuster, the bill would require all 52 Senate Republican votes and 8 Democratic votes. Govtrack currently predicts that the bill has a 37% chance of being enacted.

II.       Offers of Judgment and Mootness

In our November 2016 update, we noted that the Court in Campbell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016), had left open the question of whether a defendant could moot a class action by depositing the full amount of the named plaintiff’s individual claim in an account payable to the plaintiff, where the court then enters judgment for the plaintiff in that amount. We also noted that, since Campbell-Ewald, the Third, Sixth, and Ninth Circuits had held that named class plaintiffs may continue to seek class certification even if they no longer have a justiciable claim for individual relief.

In our March 2017 update, however, we noted that the Second Circuit in Leyse v. Lifetime Entertainment Services and the Seventh Circuit in Wright v. Calumet City, Illinois had declined to follow this line of cases, albeit on different facts.

In Wright, the Seventh Circuit had held that plaintiffs who accepted a Rule 68 settlement offer no longer had any personal stake in a class litigation unless the settlement agreement expressly preserved that right. Where they hadn’t, the court lacked jurisdiction under Article III.

In June, however, in Fulton Dental LLC v. Bisco Inc., 860 F.3d 541 (7th Cir. 2017), the Seventh Circuit ruled for plaintiffs on the precise Campbell-Ewald hypothetical: an unaccepted settlement offer made under Rule 68 coupled with a deposit of funds into the court registry pursuant to Rule 67. In an opinion by Chief Judge Wood, the court concluded that there was no principled distinction to be drawn between the Campbell-Ewald holding and the Campbell-Ewald hypothetical. The court held that a deposit of funds into the court registry does not moot a plaintiff’s individual claim, let alone its class claim. Among other things, the court noted that these funds do not necessarily belong to plaintiffs, and the court registry is not “an account payable to the plaintiff.” The court also “reconfirmed” that “as long as the proposed class representative has not lost on the merits before a class certification motion is filed, it is not barred from seeking class treatment.”

A month after Fulton Dental, a different Seventh Circuit panel in Conrad v. Boiron Inc., 869 F.3d 536 (7th Cir. 2017), also held that contract law principles prevent an unaccepted settlement offer from mooting a plaintiff’s individual and class claims.

The Second Circuit also has disputed the premise that a plaintiff no longer has a justiciable individual claim under the Campbell-Ewald hypothetical, notwithstanding Leyse. In Leyse, the defendant made an offer to settle the individual claim in full, the plaintiff rejected it, and the district court subsequently entered judgment for the plaintiff on the plaintiff’s individual claim. The Second Circuit held that, because Campbell-Ewald explicitly did not address this factual scenario, it was bound by circuit precedent in Tanasi v. New Alliance Bank, 786 F.3d 195, 198 (2d Cir. 2015), which the Leyse court characterized as “permit[ting] a [district] court to enter a judgment in the plaintiff’s favor” on its individual claim in these circumstances.

But less than a month after our March 2017 update, the Second Circuit reversed course, apparently creating an intra-circuit split on the validity of such dismissals. In Radha Geismann v. ZocDoc, 850 F.3d 507 (2nd Cir. 2017), on facts similar to Leyse, the court reasoned that Campbell-Ewald’s logic resolves this issue in favor of plaintiffs, even if its holding expressly does not. The court held that, insofar as Campbell-Ewald treated an unaccepted settlement offer as a legal nullity, it rendered the district court’s entry of judgment a “precluded dismissal,” and thus “the judgment should not have been entered in the first place” and the plaintiff’s individual claim must necessarily be permitted to proceed. The court interpreted Tanasi as “declining to address this question” and did not cite or otherwise reference Leyse. A month later, a different Second Circuit panel followed Radha Geismann, also without referencing Leyse, in Lary v. Rexall Sundown, Inc., 686 Fed.Appx. 63, 64 (2d. Cir. 2017).

The Leyse court had affirmed dismissal of the plaintiff’s class claims on other grounds, and with respect to plaintiff’s individual claim, it emphasized that an unaccepted offer “does not moot a case—that is, it does not strip the district court of jurisdiction over the case,” even if the district court is permitted to enter judgment. Thus, even if the Second Circuit adopts Leyse going forward on the validity of dismissing a plaintiff’s individual claims, at most it is an open question whether an unaccepted settlement offer could moot a plaintiff’s class claims. If the Second Circuit adopts the Radha Geismann holding going forward, as in Lary, it is clear that it does not, because the plaintiff’s individual claim must be permitted to proceed.

The question of whether and under what circumstances a plaintiff maintains a personal stake in a class action after settling an individual claim was recently before the Supreme Court in Microsoft v. Baker, 137 S.Ct. 1702 (2017), in a different context involving the appealability of certification denials. In June, the majority ruled for the defendants on the appealability question without reaching the mootness issue. However, Justices Thomas, Alito, and Roberts, who concurred only in the judgment, would have held that the certification denial was not appealable because the court lacked jurisdiction under Article III of the Constitution. The concurring justices reasoned that “[c]lass allegations, without an underlying individual claim, do not give rise to a ‘case’ or ‘controversy,’” but rather are “simply the means of invoking a procedural mechanism.” Justice Gorsuch did not take part in the decision, and it is not clear how the four justices who joined Justice Ginsburg’s majority opinion – including Justice Kennedy – might have ruled on this issue if the case were not susceptible to resolution on other grounds.

III.        Ascertainability

In our March 2017 update, we reported on an ongoing circuit split over whether Rule 23 contains a heightened ascertainability requirement that demands class plaintiffs plead and prove an administratively feasible mechanism for identifying class members. In January, the Ninth Circuit in Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017), had joined the Sixth, Seventh, and Eighth Circuits in rejecting an administrative feasibility prerequisite, while the First, Second, and Third Circuits (and to a lesser extent, the Eleventh Circuit[2]) had embraced some form of a heightened ascertainability requirement.

In October, the Supreme Court refused to enter the fray, declining ConAgra’s petition for certiorari in Briseno. No. 16-1221. The Court had previously declined cert. petitions in Mullins v. Direct Digital, 795 F.3d 654 (7th Cir. 2015) (No. 15-549), and Rikos v. The Proctor & Gamble Co., 799 F.3d 497 (6th Cir. 2015) (No. 15-835), but this was the first time it has done so since Justice Gorsuch ascended to the bench.

In July, meanwhile, the Second Circuit switched sides in In re Petrobras Securities, 862 F.3d 250, 265 (2d. Cir. 2017). The court repudiated the heightened ascertainability “theory” and narrowly cabined contrary precedent in Brecher v. Republic of Argentina, 806 F.3d 22, 24 (2d Cir. 2015), construing Brecher’s ascertainability discussion as dicta. Having concluded that Brecher did not create an independent administrative feasibility requirement for the Second Circuit, the court explicitly declined to adopt one, and instead it “join[ed] a growing consensus that now includes the Sixth, Seventh, Eighth, and Ninth Circuits.” The court reasoned that “an implied administrative feasibility requirement would be inconsistent with the careful balance struck in Rule 23.”

In August, the Third Circuit, where the heightened ascertainability theory was first conceived, gave a slightly more forgiving interpretation in City Select Auto Sales Inc. v. BMW Bank of North America Inc., 867 F.3d 434 (3d Cir. 2017). The court vacated and remanded a district court’s denial of class certification, holding that affidavits from class members coupled with other reliable evidence could satisfy the standard. Concurring Judge Fuentes wrote separately to criticize the “the unnecessary burden on low-value consumer class actions” created by the heightened ascertainability requirement. He suggested that the Third Circuit should join the Second, Sixth, Seventh, and Ninth Circuits in rejecting it.

A week after City Select was decided, however, a district court in the Third Circuit held that indirect-purchaser victims in a drywall price-fixing conspiracy could not satisfy the ascertainability requirement through a combination of affidavits, receipts, purchase records from big box retailers, and photographs of the drywall imprinted with the manufacturer’s name.[3] In addition, the Sixth Circuit in Sandusky Wellness Center, LLC v. ASD Specialty Healthcare, Inc., 863 F.3d 460, 472 (6th Cir. 2017), recently declined to reverse a district court opinion that denied class certification based on a combination of predominance and ascertainability considerations. However, the panel did not embrace the ascertainability requirement for the Sixth Circuit. It saw “no need to add our own opinion to this debate” and affirmed the district court’s denial of class certification on alternative, superiority grounds.

The Fifth, Tenth, and D.C. Circuits have not yet explicitly addressed the issue.

IV.       Appealability of Certification Denials

The Supreme Court in Microsoft v. Baker, discussed above, held that plaintiffs who lose on class certification cannot convert a district court’s interlocutory order into a final judgment within the meaning of § 1291 by dismissing their individual claims with prejudice subject to a right to revive the claims if the class certification decision is reversed on appeal. The issue arose after the Ninth Circuit denied interlocutory review of a district court order denying class certification, and the plaintiffs implemented this “dismissal device.” The Ninth Circuit subsequently heard the appeal and reversed the denial of certification.

Reversing, the Supreme Court held that the final-judgment rule codified in § 1291 requires that finality “be given a practical rather than a technical construction.” Here, permitting the plaintiffs’ dismissal device would subvert the final-judgment rule and Congress’s balanced solution for determining when non-final orders may be immediately appealed. The Court believed the dismissal device invites protracted litigation and piecemeal appeals, undercuts Rule 23(f)’s discretionary regime, and is one-sided in that it allows plaintiffs, but never defendants, to force immediate appeal of an adverse ruling.

V.        Class Action Waivers

In our March 2017 update, we noted that the Supreme Court granted cert. in Lewis v. Epic Systems Corporation, 823 F.3d 1147 (7th Cir. 2016) (No. 16-285), Morris v. Ernst & Young, LLP, 834 F.3d 975 (9th Cir. 2016) (No. 16-300), and Murphy Oil USA, Inc. v. NLRB, 808 F.3d 1013 (5th Cir. 2015) (No. 16-307), which involve the use of mandatory arbitration provisions containing class action waivers in employment agreements. The NLRB (and some circuits) held that such waivers are illegal under the National Labor Relations Act (NLRA) and captured by the FAA’s savings clause, which makes arbitration provisions valid “save upon such grounds as exist at law or in equity for the revocation of any contract.” The consolidated cases have now been briefed and argued.

In an exceedingly rare turn of events, the Trump Administration’s Office of Solicitor General (OSG) has switched sides in the middle of the case. Notwithstanding that the SG’s office represented the NLRB in the Murphy Oil petition, it has since filed an amicus brief and orally argued in support of the employers. Principal Deputy Solicitor General Jeffrey Wall stated that, “since the change in administration, the Office reconsidered the issue and has reached the opposite conclusion.”[4] The NLRB received permission from the SG to litigate on its own behalf, thereby pitting an independent federal agency against the Trump Administration’s Department of Justice.

A SCOTUSblog analysis of oral argument predicted that the Court will divide 5-4 along ideological lines, insofar as petitioners appear to have the votes of Justices Kennedy, Roberts and Alito, while respondents appear to have the votes of Justices Breyer, Kagan, Sotomayor and Ginsburg.[5] Justices Thomas and Gorsuch did not ask any questions during oral argument.

In previous updates, we have also been tracking the progress of a preliminary Consumer Financial Protection Bureau (CFPB) rule that would have barred the use of class action waivers in arbitration provisions in consumer financial products and services agreements. On July 19, 2017, the CFPB published its final rule. On July 25, the House voted 231-190 to disapprove the rule under the Congressional Review Act (CRA). On October 24, the Senate voted 51-50 to follow suit, with Vice President Pence casting the tie-breaking vote. On November 1, President Trump signed the joint resolution of disapproval into law.

Under the CRA, passing a resolution of disapproval not only means that the “rule shall not take effect (or continue),” but, in the future, “the rule may not be issued in ‘substantially the same form’ as the disapproved rule unless it is specifically authorized by a subsequent law.” Judicial review of any “determination, finding, action, or omission,” is also prohibited.[6]

We also noted previously that the Centers for Medicare & Medicaid Services (CMS), an agency within the Health and Human Services Department, issued a rule banning the future use of binding pre-dispute arbitration agreements by long-term care facilities participating in Medicare and Medicaid. Several provider groups promptly filed lawsuits challenging the pre-dispute arbitration ban as being in conflict with the FAA, and a district court in Mississippi issued a preliminarily injunction. Shortly afterwards, the CMS issued a memorandum suspending enforcement of the rule. In June, the CMS issued proposed revisions to its rule that would remove the prohibition on pre-dispute binding arbitration agreements but would require various transparency measures in arbitration agreements.

Finally, we noted previously that the Supreme Court granted certiorari in Kindred Nursing Centers, et al. v. Clark, and that the case had been briefed and argued over the winter. The question presented was “[w]hether the FAA preempts a state-law contract rule that singles out arbitration by requiring a power of attorney to expressly refer to arbitration agreements before the attorney-in-fact can bind her principal to an arbitration agreement.” In each of three consolidated wrongful death cases at issue, an agent with power of attorney for the decedent signed admission documents to nursing homes that included an arbitration clause.  The Kentucky Supreme Court, in Extendicare Homes, Inc. v. Whisman, 478 S.W.3d 306, 330 (Ky. 2015), refused to enforce the arbitration clause because it was unwilling to draw the inference that the agent had “authority to waive his principal’s constitutional right to access the courts and to trial by jury.” Rather, it held that “the power to waive generally such fundamental constitutional rights must be unambiguously expressed in the text of the power-of-attorney document.”

In May, in a 7-1 decision written by Justice Kagan, the Court held that the Kentucky Supreme Court’s clear-statement rule violated the FAA by singling out arbitration agreements for disfavored treatment. 137 S.Ct. 1421 (2017). The Court reasoned that, when the Kentucky Supreme Court singled out the waiver of the right to go to court and receive a jury trial for special treatment, “it did exactly what Concepcion barred: adopt a legal rule hinging on the primary characteristic of an arbitration agreement . . . .” In dissent, Justice Thomas stated that he continues to adhere to the view that that the FAA does not apply to state court proceedings. Justice Gorsuch took no part in the decision.

VI.       Tolling

The Ninth Circuit held in Resh v. China Agritech, 857 F.3d 994 (9th Cir. 2017), that the pendency of an uncertified class action tolls the statute of limitations for subsequent class actions, not just individual claims. Under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), when class certification is denied, an unnamed class member’s individual claims are tolled for the pendency of a class action. This enables an unnamed class plaintiff to later bring a separate individual claim if class certification is denied, even if class certification is denied after the statute of limitations on the individual claim has expired. Resh expands American Pipe to allow unnamed class plaintiffs to later bring a separate individual or class claim when class certification is denied.

The court recognized that allowing unnamed plaintiffs to later bring class actions as named plaintiffs could lead to successive attempts at certifying a class, but the court was satisfied that its holding would not lead to abusive, repetitive filings, because class counsel on contingency fee arrangements have little incentive to bring such cases, and ordinary principles of preclusion and comity will further reduce those incentives. At the same time, the court reasoned that permitting the tolling of class claims where putative class plaintiffs can satisfy Rule 23 and overcome any comity or preclusion obstacles would advance the policy objectives that led the Supreme Court to permit tolling in the first place.

VII.    Cy Pres

After two years, the appeal of the settlement in Gaos v. Google, Inc., originally discussed in our November 2015 update and referenced in our March 2016, November 2016, and March 2017 updates, has been resolved. In August, the Ninth Circuit upheld the parties’ $8.5 million settlement of a privacy claim related to Google search queries where all of the funds were approved to go to cy pres recipients for Internet privacy protection projects, rather than to any of the more than 100 million class members. Objectors had argued that a claims process was feasible because only a negligible number of class members would likely submit claims.  They also challenged the choice of cy pres recipients because of the affiliation of plaintiffs’ lawyers and Google with the recipients’ institutions.

The Ninth Circuit was able to “quickly dispose” of the argument that the district court erred by approving a cy pres–only settlement, holding that such settlements are not only permitted but appropriate where proof of individual claims would be burdensome or it would be costly to distribute damages. The court likewise “easily reject[ed]” the argument that a class action cannot be the superior means of adjudicating a controversy under Rule 23(b)(3) if it results in a non-distributable fund. On the contrary, the court reasoned that the class mechanism can be superior in these circumstances for the same reason a cy pres-only settlement is appropriate: because the litigation would otherwise be economically infeasible.

With regard to the choice of cy pres recipients, the court held that Google’s previous donations to some of the cy pres recipients did not constitute a “significant prior affiliation,” and that while more significant alumni connections may warrant closer scrutiny, the “barebones” allegation that the settlement is tainted because counsel received a degree from a recipient academic institution “can’t be entertained with a straight face” where the affected schools graduate thousands of students a year and there are no allegations of an ongoing or recent relationship between counsel and their alma maters.[7]

A similar settlement challenged by the same objector is currently on appeal to the Third Circuit in In re Google Inc. Cookie Placement Consumer Privacy Litigation, Civ. No. 12-MD-2358 (SLR) (3d Cir. filed Mar. 7, 2017).

VIII.   Advisory Committee on Civil Rules

As we reported in our November 2016 update, the Standing Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, based on recommendations from the Advisory Committee on Civil Rules, published proposed amendments to Rule 23 for public comment in August 2016. The proposed amendments (1) require that more information be provided to the district court at the time of class notice; (2) clarify that the decision to send notice is not appealable under Rule 23(f); (3) clarify that Rule 23(e)(1) notice triggers the opt-out period in Rule 23(b)(3) class actions; (4) update Rule 23(c)(2) regarding individual notice in Rule 23(b)(3) class actions; (5) establish procedures for dealing with class action objectors; (6) refine standards for approval of class settlements; and (7) address a Department of Justice proposal to include in Rule 23(f) a 45-day period in which to seek permission for an interlocutory appeal when the United States is a party.

The comment period on the proposed amendments closed on February 15, 2017.  The draft rules, public comments, and information on three public hearings held in Washington, D.C., Phoenix, AZ, and Dallas/Fort Worth, TX, were then published at Regulations.gov.

Since our March 2017 update, the Advisory Committee on Civil Rules, the Rule 23 Subcommittee to the Advisory Committee, the Standing Committee, and the full Judicial Conference have considered final changes to the proposed rules. In May 2017, The Advisory Committee approved and forwarded the proposed rules to the Standing Committee with very few changes in the rule language and clarifying changes to the committee note. In September 2017, the Standing Committee approved and forwarded the proposed rules to the Judicial Conference with minor changes and revisions aimed at increasing clarity and succinctness. In October 2017, the Judicial Conference forwarded a package of materials including the rules and relevant excepts from the various committee reports to the Supreme Court.

If the proposed amendments are approved by the Supreme Court, they will be forwarded to Congress. If approved by Congress, they will become effective on December 1, 2018.

IX.       Specific Personal Jurisdiction

In state court suits where general personal jurisdiction is lacking, plaintiffs must establish specific personal jurisdiction, which requires that the suit arise out of or relate to the defendant’s contacts with the forum. In June, in Bristol-Myers Squibb Co. v. Superior Court of California, 137 S.Ct. 1773 (2017), the Supreme Court strictly interpreted this requirement under a due process and federalism rationale, thereby preventing a group of non-resident plaintiffs from joining with resident plaintiffs in a California lawsuit where the defendant had extensive forum contacts but the contacts were not related to the non-resident plaintiffs’ claims.

The upshot of the holding is that defendants who are engaged in nationwide conduct likely cannot be sued in state court by groups of people injured both within and outside the forum State if general jurisdiction is lacking. In a footnote, Justice Sotomayor’s dissent stressed that “[t]he Court today does not confront the question whether its opinion here would also apply to a class action in which a plaintiff injured in the forum State seeks to represent a nationwide class of plaintiffs, not all of whom were injured there.” If the Court subsequently were to take that approach, the effect likely would be to limit nationwide antitrust state indirect purchaser class actions to states where defendants are subject to general jurisdiction, and possibly to curtail their deterrence and