February 28, 2018 Articles

Tilting at Windmills: Nationwide Class Settlements after In re Hyundai and Kia Fuel Economy Litigation

The case has negative implications for all class action stakeholders.

By Jordan Elias and Adam E. Polk

Every once in a while, a case comes along that disrupts the class action playing field. The plaintiffs’ bar suffered setbacks with AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), and to a lesser extent Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011). Jurisprudence then stabilized as the corporate defense bar’s hopes for stricter ascertainability and standing requirements were dashed, at least for the moment, by the Supreme Court’s approach in Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016), and a series of certiorari denials.

The Ninth Circuit’s recent split decision in In re Hyundai and Kia Fuel Economy Litigation, No. 15-56014,—2018 WL 505343 (9th Cir. Jan. 23, 2018), is a different kind of bombshell, with negative implications for all class action stakeholders.

The parties’ interests converge at settlement approval, in securing, for plaintiffs, relief for the class and payment for their attorneys’ services and, for defendants, finality and a binding class-wide release. Hyundai not only burdens these interests but will be seized upon by the professional objectors who contest national class action settlements—an important tool for resolving controversies in our mass economy.

Class action practitioners seem to agree on the need for a swift uprooting of the Hyundai strain of jurisprudence. In overturning a $200 million settlement, the Ninth Circuit suggested that variations in state consumer protection laws may predominate over the customary common questions in cases like Hyundai: whether representations were false and misleading, the extent to which the defendant knew about misrepresentations, how uniform they were, and how broadly they extended.

By insisting on a detailed choice-of-law analysis in the settlement context, the new decision stands in tension with the Supreme Court’s holding that, “with a request for settlement-only class certification, a district court need not inquire whether the case, if tried, would present intractable management problems, see Fed. Rule Civ. Proc. 23(b)(3)(D), for the proposal is that there be no trial.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997). Under Amchem, the inquiry at settlement approval centers on whether the class received fair and adequate representation. Id. at 626‒27. The predominance analysis looks to questions that “qualify each class member’s case as a genuine controversy”—so a predominance problem may exist “when individual stakes are high and disparities among class members great.” Id. at 623‒25.

To experienced class action practitioners, Hyundai engenders an obvious conflict. In Hanlon v. Chrysler Corp., the Ninth Circuit affirmed approval of a nationwide settlement, holding, contrary to Hyundai, that “the idiosyncratic differences between state consumer protection laws are not sufficiently substantive to predominate over the shared claims”; even “the objectors acknowledged that independent of any variations in state law, there were still sufficient common issues to warrant a class action, particularly questions of Chrysler’s prior knowledge of the latch deficiency, the design defect, and a damages remedy.” 150 F.3d 1011, 1022‒23 (9th Cir. 1998).

The advertising in Hyundai influenced transactions across the entire market for the advertised vehicles. The plaintiffs alleged that all class members paid overcharges as a result of the same course of conduct, and the settlement appropriately provides the used car buyers with only half the recovery of the new car buyers who were exposed to Monroney stickers (the ones on the windows of new cars showing miles-per-gallon ratings). See 2018 WL 505343, at *10. All class members had the same motivation to pursue the most favorable outcome for the group as a whole. The class is cohesive because of the shared economic injuries and the common issues of falsity, knowledge, and scope of misrepresentation bound up with each claim. Cf. Hanlon, 150 F.3d at 1022‒23.

If Hyundai stands, the plaintiffs’ bar, and their clients with an interest in combining low-value claims to promote deterrence and redress, may see the need to file multiple overlapping class actions around the country. That would increase costs and cause an undesirable unpredictability for class action defendants. What’s more, although companies defending class actions have an interest in achieving global peace through a binding settlement agreement and release, Hyundai could impair their ability to do so efficiently. See Sullivan v. DB Invs., Inc., 667 F.3d 273, 310 (3d Cir. 2011) (en banc) (“[W]ere we to mandate that a class include only those alleging ‘colorable’ claims, we would effectively rule out the ability of a defendant to achieve ‘global peace’ by obtaining releases from all those who might wish to assert claims, meritorious or not.”).

The Underlying Litigation
The Hyundai litigation arises from statements by Hyundai Motor America and Kia Motors America about gas-mileage performance in advertisements and on Monroney stickers. The litigation began after the defendants issued a joint press release in November 2012 announcing errors in their fuel-economy testing for 900,000 of their vehicles sold between 2010 and 2012. Along with the press release, Hyundai and Kia launched a reimbursement program to compensate affected customers for added fuel costs. Individual reimbursement amounts varied based on vehicle, odometer reading, and average gas price in customers’ locales. To collect, people had to visit their local auto dealers regularly for verification.

More than 50 class actions were filed around the country and consolidated in the Central District of California. After a period of litigation and discovery, the parties agreed on terms of settlement.

The Settlement
The Hyundai settlement would benefit a nationwide group of people who purchased or leased an affected vehicle before the defendants’ press release. The plaintiffs alleged that, given the downgraded fuel-economy ratings, these people paid more for their cars than they were worth. In lieu of continued participation in the reimbursement program, settlement class members could claim a lump-sum payment of several hundred dollars, dealer service credits, or a new car rebate. Experts valued the total claims made at more than $159 million, and the district court found that the claims process was “on track to reach an estimated $210 million.” Hyundai, 2018 WL 505343, at *24 n.7 (Nguyen, J., dissenting). The settlement agreement releases the defendants from claims relating to their alleged false advertising of the vehicles’ fuel economy.

The district court preliminarily approved the settlement and conditionally certified the settlement class on August 29, 2014. The main objection to the settlement was that potential conflicts among state laws precluded nationwide class certification. See Memorandum in Opposition, In re Hyundai & Kia Fuel Econ. Litig., No. 2:13-ml-02424-GW-FFM (C.D. Cal. Apr. 1, 2014), ECF No. 223 at 16‒19 (arguing “there are simply too many jurisdictions involved”). Objectors highlighted a unique provision of the Virginia Motor Vehicle Warranty Enforcement Act requiring replacement or a full refund upon a showing of a nonconformity that “significantly impairs” a vehicle’s safety or value. Va. Code Ann. § 59.1-207.13.

The court rejected the objections, granting final approval and certifying the settlement class on June 11, 2015. In doing so, the court adhered to its tentative rulings that “in the settlement context there will be no litigation management issues resulting from potentially varying state law causes of action” and that the settled claims for consumer fraud involved predominating common issues of falsity, knowledge, and scope in relation to the underlying representations. In re Hyundai & Kia Fuel Econ. Litig., No. 2:13-ml-02424-GW-FFM, 2014 WL 12594158, at *7 (C.D. Cal. June 26, 2014) (citing, inter alia, Hanlon, 150 F.3d at 1022‒23, and Sullivan, 667 F.3d at 303‒4).

The objectors appealed.

The Ninth Circuit’s Decision
On January 23, 2018, the Ninth Circuit handed down Hyundai, vacating the settlement approval and taking issue with the district court’s predominance findings. The majority agreed with the objectors that the district court “abused its discretion by failing to conduct a choice of law analysis or rigorously analyze potential differences in state consumer protection laws before certifying a single nationwide settlement class under Rule 23(b)(3).” 2018 WL 505343, at *12.

The majority reasoned that the district court accounted neither for material variations among the state laws nor for differences in how new and used car buyers within the settlement class were situated. Id. at *12‒14. The latter was a “factual error, because there is no requirement that Monroney stickers be provided to purchasers of used cars, and there is no evidence in the record that used car owners were uniformly exposed to such stickers.” Id. at *14. Analogizing to Amchem, the majority held that “factual differences regarding used car owners’ exposure to the misleading statements translate into significant legal differences regarding the viability of these class members’ claims.” Id.

The majority concluded by citing a litigation certification case—Mazza v. American Honda Motor Co., Inc., 666 F.3d 581 (9th Cir. 2012)—and holding that “because the record does not support the presumption that used car owners were exposed to and relied on misleading advertising, the district court had an obligation to define the relevant class ‘in such a way as to include only members who were exposed to advertising that is alleged to be materially misleading.’” Hyundai, 2018 WL 505343, at *14 (quoting Mazza, 666 F.3d at 596).

In dissent, Judge Nguyen criticized the majority opinion for departing from precedent and striking a “major blow to multistate class actions.” Id. at *16 (Nguyen, J., dissenting). “It is well-established that consideration of choice of law issues at the class certification stage is generally premature.” Singer v. AT & T Corp., 185 F.R.D. 681, 691 (S.D. Fla. 1998) (quoted in Sullivan, 667 F.3d at 309). Until Hyundai, courts accordingly rejected the notion that state law differences alone can unravel the class cohesion needed for common issues to predominate in connection with a settlement. See, e.g., Hanlon, 150 F.3d at 1022‒23. Ironically, by demanding a full-blown choice-of-law analysis in a case that would not be tried, the majority in Hyundai “effectively ensures that ‘no one will recover anything.’” Hyundai, 2018 WL 505343, at *25 (Nguyen, J., dissenting) (citation omitted).

Principles of Settlement Class Certification
The majority’s narrow reasoning in Hyundai is inconsistent with the current class action regime. Statutorily, the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4, and the multidistrict litigation statute, 28 U.S.C. § 1407, strongly encourage the aggregation and resolution of claims, including under state law, in national controversies. Decisional law also recognizes the utility of class settlements: A “strong judicial policy . . . favors settlements, particularly where complex class action litigation is concerned.” Class Plaintiffs v. City of Seattle, 955 F.2d 1268, 1276 (9th Cir. 1992).

The settlement approval provisions of Rule 23(e) do not obviate the need to assess class cohesion under Rule 23(b)(3). See Amchem, 521 U.S. at 622‒25. However, the predominance inquiry takes a back seat to the fairness considerations that drive the analysis at settlement approval. A leading authority even recommends dispensing with predominance for settlement purposes:

So long as there is sufficient commonality to establish that the class is generally cohesive, the propriety of a settlement need not depend on satisfaction of a “predominance” requirement. . . . The elimination of any mechanical requirement that common issues predominate should help to facilitate settlements, provided that the central indicia of fair and adequate representation are met.

Principles of the Law of Aggregate Litigation § 3.06 cmt. a (Am. Law Inst. 2010) (emphasis added).

Settlement should be facilitated because it saves court and party resources, delivers results to class members faster than protracted litigation, and allows the defendant to move on and put the matter behind it.

The district judge ensures the absence of unfair prejudice to absent members of the proposed settlement class. Therefore, the predicate inquiry is whether the class is defined in an overbroad or otherwise suspect way. To be settled together, the claims of all class members should arise from the same nucleus of operative fact—i.e., the events or transactions that qualify the litigation as a genuine controversy. Further, the relief the defendant provides under the settlement should correspond to the release of liability it obtains. The named plaintiffs must have adequately represented the class, and the proposed settlement, as structured or negotiated, must fairly account for any major differences within the class. See generally Sullivan, 667 F.3d at 334‒36 (Scirica, J., concurring).

There Is No Fundamental Conflict in Hyundai
The Hyundai settlement includes all buyers and lessors in the market affected by the fuel-economy representations. The used car prices were set in relation to the new car prices that were justified in part by the same representations. Those prices, in turn, gave rise to the alleged overcharges that the settlement, by agreement of the parties, would restore. All of the claims in Hyundai derive from the same set of facts and involve common issues. Consequently, the release of liability is fair and no major intraclass conflict exists.

“Not every conflict among subgroups of a class will prevent class certification—the conflict must be ‘fundamental’ to violate Rule 23(a)(4).” In re Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242, 249 (2d Cir. 2011). A “truly fundamental” conflict will usually involve “‘affirmative antagonism’ between class members” related to “the specific issues in controversy,” as when “some class members ‘claim to have been harmed by the same conduct that benefitted other’ class members.” 3 William B. Rubenstein, Newberg on Class Actions § 7:31 at 157‒58 (5th ed. 2013) (citations omitted); see Valley Drug Co. v. Geneva Pharm., Inc., 350 F.3d 1181, 1188‒96 (11th Cir. 2003) (remanding for discovery and analysis of fundamental conflict because “the most significant members of the certified class arguably experienced a net gain from the conduct alleged to be illegal by the named representatives”).

The core characteristics of Hyundai—economic harm, a single false advertising campaign—contrast with those in Amchem, in which the Court held that a capped settlement could not include both current and future personal injury claims without running afoul of Rule 23. The lower court had certified “a single giant class rather than . . . discrete subclasses” even though the interests of class members were unaligned in “significant respects”: Those physically harmed by asbestos exposure had “the critical goal [of] generous immediate payments,” which placed their interests at odds with the interests of “exposure-only plaintiffs in ensuring an ample, inflation-protected fund for the future.” 521 U.S. at 626. As the Ninth Circuit observed,

[t]he Amchem settlement eliminated all present and future claims against asbestos manufacturers, with class counsel attempting to represent both groups of plaintiffs. The Supreme Court found this dual representation to be particularly troubling, given that present plaintiffs had a clear interest in a settlement that maximized current funds, while future plaintiffs had a strong interest in preserving funds for their future needs and protecting the total fund against inflation.

Hanlon, 150 F.3d at 1020–21.

Two years later, in Ortiz v. Fibreboard Corp., the Court again held that “a class divided between holders of present and future claims (some of the latter involving no physical injury and attributable to claimants not yet born) requires division into homogeneous subclasses . . . with separate representation to eliminate conflicting interests of counsel.” 527 U.S. 815, 856 (1999). As in Amchem, the proposed fund in Ortiz was divided between present and future asbestos claims, without subclasses. Id. at 856‒57. The Court again rejected such a settlement for failure to comply with “the requirements of structural protection applicable to all class actions under Rule 23(a)(4).” Id.   

The circumstances of Amchem and Ortiz were “atypical.” In re Cmty. Bank of N. Va. Mortg. Lending Practices Litig., 795 F.3d 380, 393 (3d Cir. 2015) (quoting Prof’l Firefighters Ass’n of Omaha, Local 385 v. Zalewski, 678 F.3d 640, 646 (8th Cir. 2012)). The problems in Amchem and Ortiz resulted from “structural conflicts of interest . . . among the claimants themselves that would present a significant risk that the lawyers for claimants might skew systematically the conduct of the litigation so as to favor some claimants over others on grounds aside from reasoned evaluation of their respective claims or to disfavor claimants generally vis-à-vis the lawyers themselves.” Principles of the Law of Aggregate Litigation § 2.07.

Subclassing and separate representation are not necessarily required in the more typical situation—as in Hyundai—where a settlement provides more money to some class members than others. In Petrovic v. Amoco Oil Co., the Eighth Circuit rejected, as “untenable,” objectors’ argument for subclassing based on differing class member awards, commenting that “[i]t seems to us that almost every settlement will involve different awards for various class members.” 200 F.3d 1140, 1146 (8th Cir. 1999). Indeed, “if every distinction drawn (or not drawn) by a settlement required a new subclass, class counsel would need to confine settlement terms to the simplest imaginable or risk fragmenting the class beyond repair.” Int’l Union, United Auto., Aerospace, & Agric. Implement Workers of Am. v. Gen. Motors Corp., 497 F.3d 615, 629 (6th Cir. 2007). Subclassing may also lead to inefficiencies or counterproductive balkanization. See 3 Newberg on Class Actions § 7:31 at 159.

Variations in the elements of state law claims do not, by themselves, defeat certification because the proposition is that those claims never be managed through trial. Amchem, 521 U.S. at 620. “Although the Rule 23(b)(3) requirements may be a barrier to certification when the differences in state law are analyzed, one exception to this conclusion is when a settlement class is involved because manageability concerns are not implicated in that setting.” 7AA Federal Practice and Procedure Civ. § 1780.1 (3d ed.). As a result, “concerns regarding variations in state law largely dissipate when a court is considering the certification of a settlement class.” Sullivan, 667 F.3d at 297. Even a litigation class may be certified in the presence of manageability concerns. Briseno v. ConAgra Foods, Inc., 844 F.3d 1121, 1128 (9th Cir. 2017) (citing, inter alia, In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 140 (2d Cir. 2001) (Sotomayor, J.)).

Courts Have Long Approved Multistate Settlements as Fair and Efficient
Multistate resolution of mass claims brings efficiencies that outweigh minor differences in claimants’ legal paths to relief, subject to the fairness and adequacy protections of Rules 23(a)(4) and (e). The electronic notice and claim-processing mechanisms available to settling parties can make nationwide administration all the more sensible.

The Third Circuit in In re Warfarin Sodium Antitrust Litigation “agree[d] with the District Court that the fact that there may be variations in the rights and remedies available to injured class members under the various laws of the fifty states in this matter does not defeat commonality and predominance.” 391 F.3d 516, 530 (3d Cir. 2004). The court reiterated that in In re Prudential Insurance Co. America Sales Practice Litigation Agent Actions, 148 F.3d 283 (3d Cir. 1998)—a case involving deceptive sales practices—“we noted that a ‘finding of commonality does not require that all class members share identical claims,’ 148 F.3d at 310, and we rejected an objector’s contention that predominance was defeated because claims were subject to the laws of fifty states, id. at 315.” Warfarin, 391 F.3d at 530.

It is a virtue of one settlement, as opposed to many suits, that similarly injured claimants receive similar recompense: “Because of the extraordinary number of claims, fairness counsels that plaintiffs similarly injured by the same course of deceptive conduct should receive similar results with respect to liability and damages.” Prudential, 148 F.3d at 290. Thus, given a fair settlement, “no one need draw fine lines among state-law theories of relief.” In re Mexico Money Transfer Litig., 267 F.3d 743, 747 (7th Cir. 2001); accord Hanlon, 150 F.3d at 1022‒23.

In most cases for economic harm too, the claims fall within one or more broad legal categories. See, e.g., In re Pharm. Indus. Average Wholesale Price Litig., 233 F.R.D. 229, 230–31 (D. Mass. 2006) (certifying four subclasses of end payers, each asserting claims against a different defendant for violations of 41 states’ consumer protection laws); Mexico Money, 267 F.3d at 747 (upholding a settlement and explaining that the representative plaintiffs followed “the pattern of antitrust and securities litigation, where nationwide classes are certified routinely even though every state has its own antitrust or securities law”); Shaw v. Toshiba Am. Info. Sys., Inc., 91 F. Supp. 2d 942, 956‒57 (E.D. Tex. 2000) (certifying a nationwide settlement class of computer purchasers alleging breach of warranty; finding that the relevant warranty laws were essentially the same in every state so common questions of law predominated).

Riding On with the Vehicle Owners
The Ninth Circuit approved an extension of time for the en banc petition in Hyundai, so it is now due on March 8, 2018. The issues at stake are important and worthy of the full court’s review. The dissenting judge’s well-crafted arguments that the majority misapplied the deferential standard of review, and created conflicts of law within the court’s jurisprudence, make it especially likely that the petition will be granted.

It is worth recalling that in Phillips Petroleum Co. v. Shutts, the Supreme Court held that a single court can bind the citizens of all states with a class action judgment. 472 U.S. 797, 806‒14 (1985). The Court noted in part that class actions

permit[] litigation of a suit involving common questions when there are too many plaintiffs for proper joinder. Class actions also may permit the plaintiffs to pool claims which would be uneconomical to litigate individually. . . . [M]ost of the plaintiffs would have no realistic day in court if a class action were not available.

Id. at 809.

The same thing is true in Hyundai.

The only interested parties who would benefit from Hyundai are the settlement objectors who routinely advocate legal formalism over “the pragmatic spirit of Rule 23.” Yaffe v. Powers, 454 F.2d 1362, 1366 (1st Cir. 1972); Williams v. Mohawk Indus., Inc., 568 F.3d 1350, 1357‒59 (11th Cir. 2009). For the time being, class action practitioners in the Ninth Circuit will litigate and negotiate in the shadow of Hyundai. There is room for creativity in this new, untested terrain. Settling parties may choose to exercise caution, for example, by stipulating to the applicability of a federal statute or the law of a single state (through a complaint amendment or otherwise) or by proposing subclasses and submitting the kind of state law surveys that, until now, have supported requests to certify litigation, not settlement, classes.

Jordan Elias and Adam E. Polk – February 28, 2018