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January 19, 2017

The Division 1 and YLD Advocacy Practicum Series

Anthony D. Lehman and Nick Holmes

Those of us in the construction industry are familiar with “construction defect” cases. There is, of course, an actual issue in those cases, with the parties disputing who is responsible for it. Take the common example of a building suffering from water intrusion. The dispute is not whether water intrusion is a problem but what is causing the intrusion. Is there a design flaw? Did the framer make a mistake installing the windows? Is there inadequate flashing? The case generally comes down to competing expert opinions, with an evidentiary hearing necessary to resolve the dispute.

Over the last several years, however, a new type of “construction defect” case has become more prevalent — the construction defect class action, in which a few construction defect plaintiffs (generally consumers) seek to represent everyone that bought the product.  You would hardly recognize it as a construction case. The plaintiffs say they need not prove injury or causation, at least not in the traditional sense. That is, the claim is not that the windows are leaking, but simply that they are prone to leaking. And, rather than seeking repair costs, the plaintiffs seek so-called “price premium” damages: the difference between the purchase price of the windows and the hypothetical price the plaintiffs would have paid had they known that the windows were prone to leaking.

This approach likely seems bizarre to you. Why would a person with a leaky window want only a partial refund of the purchase price rather than repair cost? The answer is one of scale: by making the case about many products instead of just a few, the overall exposure in the case increases enormously.

A discussion of the strategies to deal with such actions once filed is beyond the scope of this article. We instead focus below on strategies for recognizing and avoiding the class action in the first place.

I. A Class Action Primer

Federal Rule of Civil Procedure 23 and many state corollaries permit a small number of plaintiffs to sue on behalf of many if certain conditions are satisfied. Under the federal rule, any proposed class must be “numerous,” there must be “common questions of law or fact” among the class, the plaintiff’s claims must be “typical” of the claims of the class, and the plaintiff must be able to “fairly and adequately” represent the class. See Fed. R. Civ. P. 23(a). In addition, the proposed class must meet the requirements of Rule 23(b), which most often means that common questions of law and fact “predominate over” any individual questions and that a class action be superior to other methods of resolving the disputes. See Fed. R. Civ. P. 23(b)(3).

 In many construction defect class actions, the “predominance requirement” of Rule 23(b)(3) takes center stage. The plaintiff argues that the product contains a design defect that makes it “defective,” and that deciding that issue for the plaintiff is dispositive for all purchasers. The defendant argues that a product cannot be “defective” in the abstract, that determining whether and why a particular person’s product failed requires an individual inquiry, and that those individual inquiries “predominate” over any abstract general question such that certification is inappropriate.

II. Recent Construction Defect Class Action Decisions Suggest Traditional Proof of Injury or Causation is not Required

A number of construction defect class actions have been decided recently. While the decisions vary depending on the judge and the precise allegations, certain of them suggest that proof of injury and causation in the traditional sense is not required. See, e.g., In re IKO Roofing Shingle Products Liab. Litig., 757 F.3d 599 (7thCir. 2014) (Easterbrook J.); Marcus v. BMW of North Am., LLC, 687 F.3d 583 (3d Cir. 2012); Pella Corp., et al. v. Saltzman, 606 F.3d 391 (7th Cir. 2010) (Posner, J.); see also In re Whirlpool Corp. Front-Loading Washer Prods. Liab. Litig., 678 F.3d 409 (6th Cir. 2012).

The Seventh Circuit’s IKO decision is illustrative. The plaintiffs were purchasers of roofing shingles said to be “defective” because they had not been appropriately tested prior to sale. The plaintiffs sought to represent all purchasers, split into two groups: those that had a manifest problem (who sought traditional damages) and those that did not (who sought price premium damages). The Seventh Circuit first summarized the variations among class members that the district court had found precluded certification: “IKO’s tiles are exposed to the elements, where they may fail no matter how well constructed. Tornados and hurricanes may rip them off; storms may lift them up so that water gets under them. Poor installation may shorten their expected life. At the same time, some tiles that flunk the D225 standard will last indefinitely.”

In short, the district court had found that there could be no class action because there was no way to know whether a particular person had suffered any harm as a result of the supposed defect without looking at the person’s shingles. While acknowledging the existence of these individualized issues, the Seventh Circuit nevertheless ruled that it could be appropriate to certify a class while deferring for another day the individual issues of injury and causation. In so doing, the Court did not grapple with the many problems with that approach. Was the price premium theory even theoretically viable under applicable state law? If so, what of the election of remedies problem posed by the two approaches, which the Court actually acknowledged? And how could the trial court possibly manage the tens of thousands of individual trials that would have to follow the generic class trial to determine whether any particular person was harmed?

In adopting this approach, the Court created a situation foreign to most contractors and construction lawyers: the potential for tens of millions of dollars in potential liability with a substantial lack of clarity as to how and when — if ever — the defendant would be permitted to provide evidence that someone else caused the problem or even that there was no problem at all.

III. Steps a Company Can Take to Minimize Risk Given the Uncertainty in the Cases

The mere filing of a construction defect class action poses a challenge for the defendant. Rather than having a well understood cause of action with finite exposure, suddenly the defendant faces great uncertainty. The underlying causes of action are governed by unclear legal standards, the exposure can be large, and the costs of defending the action both in expense and employee time commitment are substantial.  At the same time, the cases can be hard to settle because of the large exposure and the requirement for court approval of any class settlement. It is not a situation that any company wants to be in. While there is no perfect way to avoid becoming the subject of a class action, there are certain steps a company can take to minimize the risk.

First, be aware of the warning signs. Virtually all building products have a few problems. But if more than the normal, small amount of product is leading to claims — even if there is variation in the nature or cause of the problem — there is a substantially increased risk that the product will ultimately become the subject of a construction defect class action.

Second, react to those warning signs. One obvious first step is to limit the exposure: fix or stop using the offending product. With respect to products already in the field, be prepared to go the extra mile. A construction defect class action needs a plaintiff, and many plaintiffs are created by bad customer service experiences. So consider whether it is appropriate to provide more than the limited warranty requires, to complete repair work beyond the warranty period, and/or to take other steps to keep customers happy. And communicate, communicate, communicate — making a customer feel heard often helps as much as anything.

Finally, get the word out to everyone in the organization to be careful when they talk about the product, especially in writing. One bad email, even one taken out of context, can have surprisingly large consequences even when the data shows that the problem is in fact not widespread.

IV. Communication is Critical

Construction defect class actions are a reality, and they are proliferating. Because the options for disposing of such an action once filed are less than ideal, do what you can to avoid the situation in the first place. Be attuned to the warning signs, go the extra mile when you see those warning signs, and communicate, communicate, communicate.

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Anthony D. Lehman

Hudson Parrott Walker LLC, Atlanta, GA, Division 1 (Litigation & Dispute Resolution)

Nick Holmes

Devine, Millimet & Branch, PA, Manchester, NH, Division 1 (Litigation & Dispute Resolution)