Dewey v. Volkswagen Aktiengesellschaft, etc., Nos. 10-3618, 10-3651, 10-3652 and 10-3798; Third Circuit; opinion by Smith, U.S.C.J.; filed May 31, 2012. Before Judges Fuentes, Smith and Jordan. On appeal from the District of New Jersey. [Sat below: Magistrate Judge Shwartz.] DDS No. 07-8-6591 [51 pp.]

This appeal arises from the certification of a class and approval of a settlement in a products liability suit concerning several models of cars manufactured by Volkswagen of America Inc., Audi of America Inc., and related entities with allegedly defective sun roofs that allowed water to leak into the vehicles. Plaintiffs assert claims for, inter alia, violations of the New Jersey Consumer Fraud Act, negligent misrepresentation, and breaches of express and implied warranties.

As part of the settlement, one group of class members (the reimbursement group) received the right to reimbursement for certain qualifying damages, paid from an $8 million fund. The remaining class members (the residual group) were required to wait until the reimbursement group made its claims. They could then make “goodwill” claims on the remaining money in the fund that would be distributed pro rata.

On appeal, the West objectors (named for appellant Joshua West) argue that the representative plaintiffs, all members of the reimbursement group, cannot adequately represent the interests of the class members in the residual group.

Held: Because the representative plaintiffs had an interest in excluding other plaintiffs from the reimbursement group, while plaintiffs in the residual group had an interest in being included in the reimbursement group, the former cannot adequately represent the latter. Since the interests of the representative plaintiffs do not sufficiently align with those in the residual group, the class fails to satisfy Federal Rule of Civil Procedure 23(a)(4). The district court improperly certified the class.

After finding that the magistrate judge properly exercised jurisdiction in this action, the court considers whether the class, as certified, satisfies Rule 23(a)(4)’s requirement that the representatives fairly and adequately protect the interests of the class. This adequacy requirement has two components. The West objectors question only the second: the representative plaintiffs’ interests and incentives.

The Supreme Court considered this component in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1996), and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1997). Amchem involved a conflict between class members who had already manifested injuries and those who had not yet done so and held that their interests were not aligned. Ortiz reversed the approval of a class in part because under Amchem, present and future claimants have different incentives in negotiating a settlement and that present claimants cannot adequately represent future claimants.

Thus, the Third Circuit looks to whether there is an intraclass conflict that is fundamental in this case. As to the alleged conflict between the representative plaintiffs, all of whom have sustained an injury, and the representative class who are interested primarily in securing an adequate inflation-protected fund to compensate future injury, the court says the class members who have already suffered leaks, and thus are “past” claimants, can continue to suffer leaks to the same extent as a future claimant and can continue to make future claims. Thus, they have an incentive to protect the ability to make claims for future damage. Moreover, the settlement is structured to ensure that past claimants have an incentive to protect the rights of all members of the class to make future claims. Thus, the misalignment of interests here is different than in Amchem.

The court rejects the West objectors’ argument that because the representative plaintiffs can seek damages for past leaks — the vast majority of their damages — they will likely value future protections less than class members with no leak-related damages. It says the argument is unduly speculative and any differing valuations by the representative plaintiffs would not create a conflict sufficient to undermine their ability to adequately represent the class.

However, the court says the structure of the settlement, which divides a single class into two groups of plaintiffs that receive different benefits, supports the inference that the representative plaintiffs are inadequate.

The representative plaintiffs sorted the various car model runs by their claims rates and drew a line. Those with claims rates above the line were placed in the reimbursement group. Every plaintiff had an incentive to draw the dividing line just beneath their model run, placing as many cars as possible into the residual group, to give class members in the reimbursement group the best chance at having their claims satisfied in full. Thus, representative plaintiffs had an interest in excluding other plaintiffs from the reimbursement group, while plaintiffs in the residual group had an interest in being included in the reimbursement group. This is precisely the type of allocative conflict of interest that exacerbated the misalignment of interests in Amchem.

Thus, says the court, there is a fundamental intraclass conflict between the representative plaintiffs, all of whom are in the reimbursement group, and those plaintiffs in the residual group. Therefore, it reverses the District Court’s order certifying the class because the representative plaintiffs fail to satisfy the adequacy requirement in Rule 23(a)(4).

The court says that on remand, to satisfy Rule 23(a)(4), the representative plaintiffs can do away with the distinction between the reimbursement group and the residual group and allow all members of the class to submit reimbursements with no difference in priority, or they could simply divide the groups into subclasses that would be certified separately.

For John M. Dewey et al. — Angelo J. Genova and Dina M. Mastellone (Genova Burns Giantomasi & Webster) and Jay P. Saltzman and Samuel P. Sporn, of the N.Y. bar (Schoengold & Sporn). For Jacqueline Delguercio et al. — Adam M. Slater and Matthew R. Mendelsohn (Mazie, Slater, Katz & Freeman). For defendants Volkswagen of America Inc. et al. — Jeffrey L. Chase and Keith A. Frederick, of the N.Y. bar (Herzfeld & Rubin) and Peter J. Kurshan (Chase, Kurshan, Herzfeld & Rubin). For Lester Brickman et al. — Theodore H. Frank, of the D.C. bar (Center for Class Action Fairness). For Daniel Sibley et al. — Gary W. Sibley, of the Texas bar (The Sibley Firm) and David M. Nieporent, of the N.Y. bar (Samuel & Stein).