The Supreme Court “Saves” the Class Action:  Complex Litigation After Scalia

Just six months ago, when the Supreme Court’s current term opened in October, things looked bleak for the class action.  Three major cases were on the Court’s docket, and each seemed handpicked as a vehicle for the Court’s conservatives to curb the availability of the class action.  Nonetheless, it has now become clear that this assault has fallen short.  The high water mark in this hostile tide was probably reached in 2011 when the Court decided both Wal-Mart Stores, Inc. v. Dukes[1] and AT&T Mobility LLC v. Concepcion.[2]  In these cases, the Court both tightened the standards for class certification and opened the doors for the widespread use of boilerplate arbitration clauses in consumer contracts.  Then, in 2013, in Comcast Corp. v. Behrend[3], the Court wrote a more ambiguous decision that threatened to require that damages in a class action be established on a class-wide basis (thereby possibly barring class certification in cases in which individualized damage determinations would be necessary).  Lower courts (including the redoubtable Judge Posner) resisted this change, and Comcast was susceptible to narrower readings.  But at least one of the cases before the Court this term seemed to provide an opportunity for the Court to more strictly enforce its earlier statements about the need for a common damages model.

Still, before the Court received that opportunity to reconsider Comcast, the tide began to shift in other areas.  In 2014, in Halliburton Co. v. Erica P. John Fund[4] (Halliburton II), the Court re-affirmed the “fraud on the market” doctrine, thereby permitting securities class actions to continue pretty much as before.  At bottom, stare decisis won out over a concerted attack from the financial industry and conservative activists.  A year later, in Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund,[5] the Court actually liberalized the standards for liability in connection with statements of opinion.  Although the decision was limited to Section 11 of the Securities Act of 1933, it seems likely to leak over into Rule 10b-5 litigation as well.

Despite these inconsistent signs, the 2015-2016 Term still threatened to close down the class action.  Not only was the grant of certiorari in three cases a sign that the Court intended to focus on the class action context, but each of the three following cases hinted that the conservative wing had a specific agenda in mind.  It seemed as if the Federalist Society had placed their favorite hypothetical cases and theories on the Supreme Court’s docket.

1. Campbell-Ewald Co. v. Gomez

The first of the three cases before the Court, Gomez v. Campbell-Ewald Co.,[6] posed the issue of whether defendants could pick off the class representative by offering it full individual relief in order to thereby moot both the class representative’s claims and the putative class action.  Although the Ninth Circuit had declined to hold that such an offer mooted the class action, decisions in the Fourth, Sixth and Third Circuits had come to the opposite conclusion, finding that federal courts were deprived of Article III jurisdiction by the absence of any representative with a “live” claim.[7]  Moreover, in 2013, the Court had decided a similar case in General Health Care Corp. v. Symczyk,[8] where it found that if the defendant served the plaintiff with an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure that fully satisfied the plaintiff’s individual damages claim, then the class action could not be maintained.  The narrow difference between General Health Care and Campbell-Ewald was that the plaintiff in General Health Care did not dispute that her individual claim had been mooted by the defendant’s offer.  In contrast, plaintiff Gomez in Campbell-Ewald made no such concession.  In violation of the Telephone Consumer Protection Act, defendants had placed a phone call to Gomez, using an automatic dialing system (specifically, a text message was sent to his cellular phone).  Nothing about the case carried any hint of fraud or abuse, as Campbell-Ewald was acting as a marketing agency for the United States Navy in a Navy recruiting campaign.  Still, because Gomez the plaintiff had not consented to this call, he was entitled to his “actual monetary loss” or $500, “whichever is greater,” and the damages could be trebled if “the defendant willfully or knowingly violated the Act.”  Plaintiff sued for treble statutory damages, costs, attorney’s fees and also sought an injunction.  Defendant offered to pay $1,503 per message (i.e., the trebled amount) plus costs (but not attorney’s fees) and to consent to an injunction (which injunction, however, “denied liability and the allegations in the complaint, and disclaimed the existence of grounds for the imposition of an injunction”[9]).

One can see here why the conservative Justices might have seen this as an attractive vehicle.  The defendant had at worst made a negligent error, and the plaintiff had a “negative value” claim that would not have justified litigation, but for the prospect of a class action recovery.  Nonetheless, Justice Ginsberg, writing for a five Justice majority, essentially agreed with Justice Kagan’s earlier dissent in General Health Care and held that that an unaccepted offer is a legal nullity that did not moot plaintiff’s individual claim.  Thus, Justice Ginsberg wrote: “Absent Gomez’s acceptance, Campbell’s settlement offer remained only a proposal, binding neither Campbell nor Gomez.”[10]

But there is a mystery here.  Why did Justice Kennedy, who had sided with the conservative majority in General Health Care, join with the dissenters in that case to form a new majority in Campbell-Ewald?  A narrow answer might be that the defendant’s offer in Campbell-Ewald was marginally narrower than the relief sought by the plaintiff (it did not cover plaintiff’s attorney’s fees and the injunction was narrower and more equivocal than that sought by the plaintiff Gomez).

More revealing, however, are two sentences at the end of the Court’s mootness analysis, which read very much like a concession made by the majority in Campbell-Ewald to hold onto the decisive swing vote of Justice Kennedy:

“We need not, and do not, now decide whether this result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount. That question is appropriately reserved for a case in which it is not hypothetical.”[11]

This narrow distinction between a mere offer and an actual tender of payment leaves us with a major uncertainty: Can defendants still pick off the class representative if they actually tender the full amount that satisfies the representative’s individual claim?  Although the Court reserved that issue for a future case, that future may not be long in coming.  On remand in Campell-Ewald Co., defendants could do precisely that, depositing the funds, and again claiming that the case is moot.  Will Justice Kennedy change his position over that small a change?  As a practical matter, the intervening death of Justice Scalia (who, of course, dissented in Campbell-Ewald) implies that the dissenters could not today hope for more than a four to four tie for the interim future.  But because a tie leaves the lower court opinion in place, this would permit those three Circuits (at least the Third, Fourth and Sixth) that had permitted the class representative to be picked off to continue to do so.

Even if such a tactic is still possible in some Circuits, would such an effort by defendants to pick off the class representative be worth the effort?  In some contexts, the answer is clearly “no.”  In a securities class action, the lead plaintiff will be a typically large institutional investor.  Paying it all its asserted losses would be prohibitively expensive when the typical recovery in a securities class action settlement is only around 2% or so of the economic loss.  Moreover, plaintiff’s counsel could quickly find another large institution to substitute for it.  In a “negative value” class action (as Campbell-Ewald clearly was), the effort may make more economic sense.  But there are probably ways to combat this tactic in those few Circuits that still permit it.  For example, plaintiffs could seek more detailed and burdensome injunctions that go well beyond requiring the defendant to cease violations of the law and instead mandate more specific affirmative relief.  Plaintiffs would be unlikely to win these at trial, but that is not the point.  The real goal is to make it too painful for defendants to settle the class representative’s case.

2. Tyson Foods

The decision most eagerly awaited by the defense bar (at least as of last October) was probably Tyson Foods, Inc. v. Bouaphakeo,[12] which came down last week on March 22.  Potentially, this case gave the Court’s conservatives the opportunity both to re-visit Justice Scalia’s assertion in Wal-Mart Stores that individualized determinations of damages could not be replaced by “Trial by Formula”[13] and to enforce and extend Comcast v. Behrend’s holding that the damages model must fit the specific legal theory advanced by the plaintiffs.  Finally, defense counsel hoped that the Court would react to the clear fact that many in the Tyson Foods class had not been injured.  Although this is not uncommon (and proof of injury is later required post-settlement at the claims resolution stage), the most zealous foes of the class action hoped that the Court would require that the class be defined to include only those truly injured.  For plaintiff’s counsel, this could have been a straitjacket.

Yet, if Tyson Foods could have been a “game-changer,” those expectations were dashed last week.  In overview, Tyson Foods was a simple case that made a poor vehicle for deciding general principles about how statistics can be used in complex litigation. In Tyson Foods, plaintiffs brought a Federal collective action claim under the Fair Labor Standards Act (“FLSA”) on behalf of employees at a single pork processing plant in Iowa, alleging that Tyson had failed to pay them for time spent donning and doffing special protective gear.  Plaintiffs also brought a Rule 23 class action under an Iowa state law that largely tracked the substantive provisions of the FLSA.  The defendant had not kept records of how many minutes each worker spent donning and doffing gear each day, so plaintiffs conducted their own study.

The controversy in the case turns on the proof that plaintiffs presented.  The plaintiffs produced two experts and the more controversial expert had timed more than 700 instances of workers donning and doffing gear and averaged the amount of time it took each one to do so.  In introducing this evidence, plaintiffs relied on the well-established practice of using representative evidence in FLSA cases.  A 1946 Supreme Court had permitted fairly simple, even casual, procedures.[14]  The defendant argued at trial and on appeal that the use of representative evidence obscured the differences between groups of workers – some wearing much more gear and taking more time; others wearing less gear and presumably taking less time.   This can be characterized as a question of class cohesion that arguably offended the predominance requirement of Rule 23(b)(3), but it can also be characterized as simply an evidentiary question.

Writing for the majority, Justice Kennedy took the latter view.  But along the way, he said much more.  First, he noted that “petitioner and various of its amici maintain that the Court should announce a broad rule against the use in class actions of what the parties call “representative evidence.”[15]  But he quickly rejected such a “categorical” rule, saying “it would make little sense.”[16]  Instead, he wrote: “Whether and when statistical evidence may be used to establish classwide liability will depend on the purposes for which the evidence is being introduced and on ‘the elements of the underlying cause of action.’”[17]  Here, he emphasized that plaintiff’s representative sample was being introduced “to fill an evidentiary gap created by the employer’s failure to keep adequate records.”[18]  More importantly, he reached out to add that:

Wal-Mart does not stand for the broad proposition that a representative sample is an impermissible means of establishing classwide liability.”[19]

The key distinction, he said, was that an individual worker, suing in an individual case, could have also cited the same study presented in Campbell-Ewald to sustain the jury’s finding in his individual case.[20]

Finally, Justice Kennedy addressed defendant’s claim that the class could not be certified “if it contains ‘members who were not injured and have no legal right to damages.’”[21]  Finding this claim to have been later abandoned even by defendants, he turned to their revised argument that uninjured class members had to be eliminated from the class prior to the judgment so that they “do not contribute to the size of the damages award.”[22]  Again, he showed little sympathy for this argument, noting that there was no evidence that damages could not be apportioned so that the uninjured received no damages.  Thus, he found that petitioner’s objections were premature.

All in all, Tyson Foods points to two tentative conclusions: (1) classes can be defined to include persons who are likely not to have been injured (at least so long as some provision is later made at the claims resolution stage to prevent windfall recoveries); and (2) Wal-Mart must be given a more circumscribed reading, particularly in its criticisms of statistical averaging.  Particularly in smaller class actions, some averaging is possible, and cases will be distinguished on their facts.  To be sure, both Wal-Mart and Tyson Foods were polar examples; the former was an unprecedentedly large nation-wide class, and the latter a modest FLSA action that resembles more a liberalized form of joinder.  The middle will remain murky.

Still, Tyson Foods suggests that the Scalia Revolution, which arguably sought to do to the class action what the French Revolution did to the French aristocracy, is now over and has fallen well short of its original goals.

3. Spokeo: The Case Still to Come

In Robins v. Spokeo, Inc.,[23] the plaintiff (Robins) alleged a Federal Credit Report Act violation by the defendant, whose website published allegedly inaccurate information, describing Robins as holding a graduate degree and being wealthy (facts that, he alleged, actually harmed his job prospects).  Arguably, the plaintiff had suffered no tangible injury, and the Ninth Circuit described his allegations of injury as “sparse.”  Still, the Ninth Circuit tersely found that Robins had Article III standing to sue, concluding, first, that “Congress’s creation of a private cause of action to enforce a statutory provision implies that Congress intended the enforceable provision to create a statutory right” and, second, that “the violation of a statutory right is usually a sufficient injury in fact to confer standing.”[24]  Although the Ninth Circuit recognized that “the Constitution limits the power of Congress to confer standing,” it also observed that “this constitutional limit… does not prohibit Congress from ‘elevating to the status of legally cognizable injuries, concrete, de facto injuries that were previously inadequate in law.’”[25]

The Supreme Court then granted certiorari on the following, carefully framed question:

“May Congress confer Article III standing upon a plaintiff who suffers no concrete harm, and who could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute.”

So phrased, the case directly challenges the power of Congress to expand the “case and controversy” requirement of Article III by creating statutory rights and causes of action for modest harms.  Yet, the dominant motivation for the defendant’s seeking (and the Court’s granting) certiorari may have been their joint fear of the class action and its ability to magnify statutory damages in allegedly minor “no injury” cases.  If so, there is a mismatch here between the danger perceived and the theory asserted.  The decision could have real impact, as the likely future claims that will be predictably affected by this decision are claims against banks, credit card issuers and large retailers that experience major data hijackings as a result of their alleged negligence.

How will the Court rule in Spokeo?  One interesting signal is the dissenting opinion of Chief Justice Roberts in Campbell-Ewald v. Gomez, supra.  There, a class action was filed by a plaintiff who received a text message without his permission in apparent violation of the Telephone Consumer Protection Act (42 U.S.C. §227(b)(I)(A)(iii)).  That injury was truly modest and considerably less than “concrete.”  After all, in Spokeo, the claim was at least that inaccurate information had in fact been circulated about the plaintiff (which seemingly is a more serious injury than simply receiving an unauthorized text message).  Still, in assessing the facts in Campbell-Ewald, Chief Justice Roberts wrote:

“All agree that at the time Gomez filed suit, he had a personal stake in the litigation. In his complaint, Gomez alleged that he suffered an injury in fact when he received unauthorized text messages from Campell.”[26]

Although the Chief Justice concluded (in dissent) that this injury was extinguished by the defendant’s offer to pay the trebled damages ($1,500), the Chief Justice seems to have had no problem with the unauthorized receipt of a text message amounting to a cognizable injury for the purposes of Article III.  The bottom line is that if the mere receipt of a text message is a sufficiently concrete injury to give rise to an Article III “case and controversy,” then a fortiori the dissemination of allegedly false information should also be sufficient in Spokeo.

Conceivably, the Court could define in Spokeo what constitutes a constitutionally sufficient injury to satisfy Article III, but such a heroic assertion of judicial power seems unlikely.  Also, Campbell-Ewald shows how common a practice it has been for Congress to legislate private causes of action covering minor to insignificant injuries.  The sheer volume of such legislation may cause the Court to restrain itself, as it might otherwise spend a decade supervising federal court decisions as to whether violations of numerous other such federal statutes gave rise to “true” Article III injuries.  Nonetheless, the matter may not end here.  Eventually, this author predicts that the Supreme Court will return to the Spokeo fact pattern to re-examine whether such injuries can be aggregated into a class action under Rule 23—a far narrower question.  For example, it might ask whether the “superiority” standard in Rule 23(b)(3) is truly satisfied by aggregating such minor injuries.  This issue has rarely been faced.  The best example of a court confronting it is Parker v. Time Warner Entm’t Co., L.P.[27]  There, the defendant had 12 million cable subscribers who were arguably each entitled to a statutory award of $1,000 because their identities had been released in violation of the Cable Communications Policy Act.  The district court initially denied certification under Rule 23(b)(3) because it believed the aggregated damages were vastly disproportionate to the defendant’s culpability or the injury actually suffered by class members.  At the Second Circuit, only Judge Newman’s concurring opinion truly faced this issue, and he would have awarded statutory damages only to the named class representatives, giving the others only injunctive or nominal relief.[28]  This column will not attempt to prescribe the proper balance, but believes the “superiority” requirement of Rule 23(b)(3) is the most elastic clause in Rule 23 that might be tailored to this purpose.

This speculation that a “penalty” class action might not be certifiable where it seeks “disproportionate” damages of (hypothetically) $1,000 each for 500,000 persons who were victimized by the conduct in a case like Campbell-Ewald raises a basic policy question: What is the difference between such a class action and the classic “negative value” class action, which has long supplied the core rationale for Rule 23?  Here, the quick answer is that the “penalty” class action, which aggregates the penalties owed to many consumers and other victims, is not an attempt to provide compensation, but deterrence.  A class action that seeks to recover a $10 overcharge, which 500,000 “victims” actually paid, fits more easily within the rationale for “negative value” class actions.  But a statutory penalty is different.  Did the Legislature really contemplate that the statutory penalty could be combined with a class action in order to aggregate damages to the potential levels in Campbell-Ewald and Spokeo?  No answer is offered here, but this is the better question than the Article III analysis that Spokeo would impose on the federal courts.

Conclusion

The Scalia Revolution has crested and begun to subside—even before that Justice’s early death.  It is premature to predict the new equilibrium point in class action practice—but it has clearly shifted.

ENDNOTES

[1] 564 U.S. 338 (2011).

[2] 563 U.S. 233 (2011).

[3] 133 S. Ct. 1426 (2013).

[4] 134 S. Ct. 2398 (2014).

[5] 135 S. Ct. 1318 (2015).

[6] 136 S. Ct. 663 (2016); the lower court decision was Gomez v. Campbell-Ewald Co., 768 F. 3d 871 (9th Cir. 2014).

[7] See Warren v. Sessoms & Rogers, P.A., 676 F. 3d 365, 371 (4th Cir. 2012); O’Brien v. Ed Donnelly Enterprises, Inc., 575 F. 3d 567, 574-75 (6th Cir. 2009); Weiss v. Royal Collections, 385 F. 3d 387, 340 (3d Cir. 2014). But see, Tomasi v. New Alliance Bank, 786 F. 3d 195, 200 (2d Cir. 2015).

[8] 135 S. Ct. 1523 (2013).

[9] 136 S. Ct. 663 at 668.

[10] Id at 670.

[11] Id at 672.

[12] 2016 U.S. LEXIS 2134 (March 22, 2016).

[13] 564 U.S. 338, at 367.

[14] See Andersen v. Mt. Clemens Potters Co., 328 U.S. 680 (1946).

[15] 2016 U.S. LEXIS 2134 at *19.

[16] Id.

[17] Id. at * 20.

[18] Id. at * 22.

[19] Id. at * 23.

[20] Id. at * 25.

[21] Id. at * 27.

[22] Id. at * 28.

[23] 742 F. 3d 409 (9th Cir. 2014), cert. granted, 135 S. Ct. 1892 (2015).

[24] 742 F. 3d at 411.

[25] Id. at 412.

[26] 136 S. Ct. 663 at 679 (dissenting opinion).

[27] 331 F. 3d 13 (2d Cir. 2003).

[28] Id at 23-24. Damages were also sought in this case as “incidental damages” under Rule 23(b)(2), but that is no longer possible after Wal-Mart.

The preceding post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law at Columbia University Law School and Director of its Center on Corporate Governance.

1 Comment

  1. khartley802

    Thank you, a great summary. But as to the “pick off” cases, I’m surprised not to see more focus on the possible collateral estoppel and res judicata effects of the actual entry of a judgment. In cases that involve the same type of conduct, it would seem there could be larger adverse consequences for the defendant if judgment is entered.

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