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Supreme Court Altering Class Action Landscape
The U.S. Supreme Court has recently issued several important decisions that will affect the future of class actions. Although these opinions involve different industries and subject areas, they send a clear message to the plaintiffs bar that it is going to get increasingly difficult to get class actions certified. If current trends continue, it looks like mostly good news for in-house counsel faced with defending their companies in class actions.
Much of the court's recent attention has focused on the viability of so-called class action waivers, which are found in the arbitration provisions of many standard-form customer agreements. A watershed decision on this issue was AT&T Mobility v. Concepcion (2011), in which the court upheld the enforceability of the waivers, ruling that the Federal Arbitration Act preempts any state law that would invalidate as unconscionable all class waivers in the consumer context.
Plaintiffs have tried to find a way around Concepcion, but the court so far has refused to soften its holding. In CompuCredit v. Greenwood (2012), the court rejected the argument that a federal statute (the Credit Repair Organizations Act) precluded the enforcement of an arbitration agreement in a private CROE claim, and in Marmet Health Care v. Brown (2012), the court held that FAA preemption also applies in state court actions.
The next major battle will come in In re American Express Merchants Litigation, in which the U.S. Court of Appeals for the Second Circuit ruled that a class waiver is unenforceable if it precludes plaintiffs from vindicating federal statutory rights (e.g., antitrust).
The Supreme Court heard arguments in late March, and many believe that a majority may be ready to reverse. That would represent another significant victory for defendants, as it would limit plaintiffs' ability to challenge class waivers to only traditional contract formation defenses such as fraud and duress, and to arguments that the specific arbitration provision is unconscionable (as opposed to Concepcion, in which the court held that state laws invalidating as unconscionable all class waivers in all consumer agreements are preempted).
If Amex Merchants is reversed, corporate counsel can continue to rely on the enforceability of such class waivers in their clients' customer agreements. To best insulate such waivers from attack, counsel should use clear and conspicuous waiver language and avoid including provisions that could be attacked as substantively unconscionable. In addition, when the arbitration provision and class waiver appear on a website or online contract, the consumer should be required to click on a link acknowledging that he reviewed and agreed to both before proceeding with the transaction. Such "clickwrap" agreements are generally enforced. In contrast, plaintiffs have successfully invalidated arbitration provisions on websites that do not require affirmative confirmation ("browsewrap" agreements).
Another win for defendants came in mid-March in Standard Fire v. Knowles. There, a unanimous court held that a class plaintiff's stipulation to limit damages below $5 million does not remove the case from the Class Action Fairness Act of 2005, which provides federal jurisdiction over multistate class complaints. The court reasoned that a plaintiff filing a proposed class action cannot legally require members of a not-yet-certified class to limit their damages. Knowles effectively eliminates plaintiffs' ability to keep class actions out of federal court by limiting damages to under $5 million.
Corporate counsel should bear Knowles in mind when determining whether to seek removal of a proposed state court class action. If the plaintiff limits her class to members of one state (or if most class members and the defendant are from that state), there may be little that corporate counsel can do about the plaintiff's choice of venue.
But if the only obstacle to federal jurisdiction is the plaintiff's allegation that the amount at issue is under $5 million, the plaintiff's characterization need not be accepted. Instead, corporate counsel should review the company's records to determine how much is really at stake. If counsel can support an argument that over $5 million in damages or other relief (e.g., the value of an injunction) are implicated by the plaintiff's claims, then removal becomes a viable option that must be carefully considered against the plaintiff's choice of venue.
Defendants experienced yet another victory when, in late March, the court decided Comcast v. Behrend, an antitrust action. In Comcast, the court held that to obtain class certification, the plaintiff's damages theory must be legally sufficient, not merely theoretical. This means that a class cannot be certified where the plaintiff cannot propose a methodology that identifies, on a classwide basis, damages resulting from the particular harm that the plaintiff seeks to prove at trial. If a proposed class includes members who may not have been affected by the defendant's conduct or whose damages cannot be measured by common proof, then the class should not be certified. Comcast rejects a common plaintiffs argument that the court need not determine at class certification that damages are measurable on a classwide basis.
In reaching its decision, the court reiterated its earlier statements in Wal-Mart v. Dukes (2011), specifically, its instruction that courts are to rigorously analyze each required element for class certification and must also analyze the merits to the extent that they affect whether the class certification elements are satisfied. Thus, Comcast confirms that courts must assess, at the certification stage, not only whether liability can be established classwide (which was the issue in Dukes), but also whether the plaintiffs have offered a competent basis to establish classwide damages. As such, Comcast and Dukes may signal the end of "trial by formula" class actions, in which liability or damages is extrapolated from a sample of persons to an entire class.
Comcast teaches that in opposing class certification, companies should ensure that all of their arguments are supported by admissible documents, knowledgeable fact witnesses, and properly qualified experts who employ generally accepted methodologies tailored to the facts of the case. Companies should also focus, at the class stage, on attacking any of the plaintiff's damages calculations or methodologies that are unreliable or unconnected to the alleged injury and resulting losses.
Other class claims can be mooted by offering judgments to individual plaintiffs. Defendants scored a class action win in mid-April in Genesis Healthcare v. Symczyk. There, the court dismissed a "collective action" brought under the Fair Labor Standards Act, where the plaintiff admitted that the defendant had offered to have judgment entered against it in an amount that would have fully compensated her for any individual damages, attorney fees, and costs. The court held that the making of this offer, which would have allowed the plaintiff to recover her full damages, divested her of any ongoing Article III interest in the case. Her individual claim for relief was satisfied, and because of the manner in which Congress designed the FLSA collective action device, she had no cognizable interest in representing other employees in the case. Accordingly, the case was moot and no longer able to proceed in federal court.
Although Genesis Healthcare did not specifically address class actions, some believe that its treatment of the mootness issue applies equally in the class action context. If so, offering a full recovery to the named plaintiffs could be a new weapon for corporate counsel to use in defeating class actions at the outset. Four circuit courts of appeal, however, have previously ruled that this strategy cannot be used to moot an otherwise potentially viable class action. It remains uncertain whether or not the impact of Genesis Healthcare will be confined to the FLSA arena or whether it will have a broader impact on the landscape of class action cases. Still, it's clear that in-house counsel have a growing arsenal of weaponry for defending against class actions.
Philip R. Sellinger is cochair of Greenberg Traurig's global litigation practice and managing shareholder of its Florham Park, New Jersey, office. David Jay is a shareholder with the firm, and Todd Schleifstein is of counsel.