April 04, 2017 Practice Points

Individual Issue of Interpretation or Understanding Does Not Predominate with Form Contracts: Third Circuit

The case is Gillis v. Respond Power, LLC.

By Caroline E. Oks

In class actions involving uniform or standard form contracts, a common strategy for defeating class certification on commonality or predominance grounds has been to focus on individual customers’ interpretations of consumer agreements or warranties. However, in Gillis v. Respond Power, LLC, the Third Circuit reversed the denial of class certification, finding that the district court erroneously relied upon irrelevant extrinsic evidence of plaintiffs’ individualized subjective understandings a provision in the standard form contract. Because, as a matter of law, “extrinsic evidence of one party’s undisclosed, subjective understanding, intent, or opinion about the meaning of ambiguous contract language cannot be used to substantiate a particular interpretation of that language,” evidence of individual understandings of standard form contracts is “especially irrelevant.”

Respond Power LLC is an energy supply company. The putative class consisted of approximately 50,000 customers who entered variable rate energy agreements with Respond. All of Respond’s variable rate agreements included a uniform disclosure statement, which included a variable rate provision stating that Respond’s “goal each and every month is to deliver [customer’s] power at a price that is less than what [customers] would have paid had [they] purchased [their] power from [their] local utility company,” but that Respond could not always guarantee that every month customers would see savings.

Plaintiffs alleged that Respond promised customers in its marketing campaigns that customers would save on their monthly electricity bills if they switched from their local utility company to Respond for their electricity supply, but did not explain how the variable rate changed over time. The district court denied Respond’s motion to dismiss or strike the class allegations and ordered the plaintiffs to file a motion for class certification. After class discovery, the plaintiffs moved to certify the class as to their claims for declaratory judgment and breach of contract/breach of implied covenant of good faith and fair dealing but did not seek certification on their negligent misrepresentation or Pennsylvania consumer protection law claims.

The district court denied certification on the ground that the need for individualized, transaction-specific proofs defeated commonality. Looking ahead to the merits of plaintiffs’ claims, the district court reasoned that if it were to decide that the variable rate provision was ambiguous as a matter of law, it would consider extrinsic evidence of the parties’ intent in order to resolve the ambiguity. Extrinsic evidence in the record revealed that the named plaintiffs had different understandings—or no understanding at all—about whether the variable rate provision provided a “rate cap” for electricity services. These different understandings, according to the district court, exposed the named plaintiffs to certain defenses that might not apply to other class members, foreclosing a finding of typicality and adequacy. Further, the district court reasoned, because the named plaintiffs did not share the same understanding of the variable rate provision, the 50,000 putative class members likely did not either. This suggested that resolving any ambiguity would require proof of each plaintiff’s individual understanding, rather than proof common to the class.

The Third Circuit granted interlocutory review under Rule 23(f) and reversed, holding that, under Pennsylvania law, the putative class members’ individual understandings and interpretations of the variable rate provision had no place in the district court’s contract construction and thus should not have factored into the class certification analysis. If the district court were to conclude as a matter of law that the variable rate provision was ambiguous, the court could then consult extrinsic evidence to ascertain the mutual intent of the parties and resolve the ambiguity. But, to the extent that extrinsic evidence reflected only “[t]he uncommunicated subjective understanding or intent of one party” about the meaning of ambiguous contract language, such evidence would be irrelevant, because the court’s objective is to discover the meaning “that . . . each party had reason to know would be given to the words by the other party.”

Further, the Third Circuit explained that standard form contracts are particularly well-suited for class treatment because individual signatories to such contracts understand that they have no bargaining power and expect to be treated like all other signatories to the form document. Thus standard form contracts should be interpreted uniformly as to all similarly situated signatories whenever it is reasonable to do so, rendering individual, transaction-specific interpretations inapposite.

The Third Circuit’s decision is certainly a win for consumers. But while putative class members’ divergent understandings of the meaning of provisions in standard form contracts may not be an impediment to proving commonality in cases involving form contracts, individual issues of putative class members’ conduct or performance under the contracts may nonetheless be critical issues for determining whether the predominance and superiority requirements of Rule 23(b)(3) can be proven particularly for misrepresentation-based claims where reliance and causation plays a pivotal role in establishing liability.

Caroline Oks is an associate with Gibbons LLC in Newark, New Jersey.

Caroline E. Oks – April 4, 2017