August 31, 2018 feature

Slamming the Brakes on Nationwide Class Actions

State law differences drive settlement of class actions off track

By Stephen Carr

A nationwide class action offers the possibility of a swift, comprehensive resolution to what could otherwise be low-stakes, piece-meal litigation in courtrooms around the country.

Problems persist when trying a nationwide class action under the laws of up to fifty states

Problems persist when trying a nationwide class action under the laws of up to fifty states

Image Illustration by Elmarie Jara | iStockphoto by Getty Images

But practical problems persist when trying a nationwide class action under the laws of up to fifty different states. An important new decision may make it more difficult to certify a nationwide class based on state law and, according to the decision’s dissenter, could “deal a major blow to multistate class actions.”

The decision comes, somewhat surprisingly, in the context of a settled class action—an area where practical concerns are less pressing because the actual case will never be tried. Settled class actions are designed to avoid the potential wastefulness of litigating multiple state class actions, while providing class members timely relief. The decision is a reminder that even when a class exists merely to resolve all claims, class counsel and the courts must carefully scrutinize the interests of all class members and be especially aware of possible harms to absent plaintiffs.

The Long and Winding Road to Class Certification

In In re Hyundai and Kia Fuel Economy Litigation, the U.S. Court of Appeals for the Ninth Circuit reversed a decision certifying a nationwide class of Kia and Hyundai car owners who had allegedly been misled about the gas mileage of their vehicles. Prior to suit, the U.S. Environmental Protection Agency (EPA) launched an investigation into Hyundai and Kia regarding allegations that the two car companies had exaggerated the fuel efficiency of their vehicles by cheating on gas mileage tests. After the investigation began but before the results were known, several plaintiffs sued Hyundai and Kia in California based on California consumer protection laws. Hyundai and Kia removed the case to federal court under the provisions of the Class Action Fairness Act.

Once the EPA announced its finding that the carmakers had overstated the mileage of their vehicles, the two companies settled with the government for $100 million and agreed to refund car owners for their increased gas costs. But the companies’ reimbursement program would require the vehicle owners to bring their cars to the dealership periodically to verify their odometers before they would receive any money.

A number of follow-on class actions from around the country were soon filed. Eventually, a multi-district litigation panel (MDL) transferred those tag-along actions to California, where the original suit had been filed.

Soon after the MDL panel transferred the cases to California, the parties announced that they had reached a nationwide settlement. Under the terms of the settlement, which the court estimated would be worth $210 million, plaintiffs could opt for a lump-sum payment based on average fuel consumption—saving car owners from having to report to the dealer periodically to receive smaller reimbursements. The predicted average lump sum for a Hyundai owner would be $351, while Kia owners would receive an average payment of $667.

The settlement also provided lower benefits for used car owners than for new car owners because used car owners would not have necessarily seen the stickers informing consumers of the cars’ mileage—making proving damages more difficult—while all new cars are required by federal law to have such stickers. The U.S. District Court for the Central District of California approved the settlement.

The district court noted that while different state laws could provide different remedies and defenses, these issues were better addressed as they related to the fairness of the settlement overall under Federal Rule of Civil Procedure 23(e). The district court also found that the vast sweep of the Hyundai and Kia’s advertising campaign would allow the court to presume that all car owners relied on the misleading advertising.

Car Owners’ Case Hits the Skids

A group of objectors appealed the decision, arguing that the differences in state law made certifying the class improper. The Ninth Circuit agreed. The appellate court focused on the fact that the district court had failed to do a “choice-of-law” analysis, as required by California law, to determine whether consumers from different states would be entitled to different remedies. Notably, the court pointed out that under a provision of Virginia law, plaintiffs from that state could be entitled to minimum damages of $500 if they could show willful violations, which would exceed the average value of the settlement to consumers.

Although the Ninth Circuit conceded that certifying a class for settlement purposes can simplify certain issues, such as trial management, the appellate court held that a choice-of-law analysis was still necessary—even when the class only existed to settle—because the court still needed to determine whether common questions predominated over differences between individuals. In doing so, the court emphasized the need to protect the rights of absent plaintiffs who may be entitled to additional relief under their states’ laws.

Even when you think you have a complex case settled, you have to be aware of the rules and procedures of all 50 states when seeking class certification.

Louis F. Burke, New York, NY

Cochair, Class Actions & Derivative Suits Committee

For class action attorneys, the decision underlines the importance of preparing arguments about the effect of various state laws when seeking class certification and backing up those arguments with exploratory discovery. “Even when you think you have a complex case settled, you have to be aware of the rules and procedures of all fifty states when seeking class certification,” explains Louis F. Burke, New York, NY, cochair of the ABA Section of Litigation’s Class Actions and Derivative Suits Committee.

In dissent, Judge Jacqueline Nguyen sharply criticized the majority for placing the burden on the parties seeking to certify the class to show that state laws do not differ substantially when the objectors had barely raised the issue below. The dissent also noted that the decision failed to focus on the most important issue: whether individual issues predominated over common questions.

“As Judge Nguyen also identified, the majority opinion starkly contrasts with the prevailing view across the circuits, which is that application of another state’s law does not defeat predominance,” explains Kathryn Honecker, Scottsdale, AZ, cochair of the Section of Litigation’s committee on Consumer Litigation. “The question is whether common issues predominate, not whether any individual issues exist. Choice-of-law questions do not defeat predominance because common questions that focus on the defendant’s conduct will advance the case regardless of which state’s law applies.”

Class Counsel Must Rev Up for Objectors

The decision comes at a time when many consumer class actions are forced to proceed in federal court due to the Class Action Fairness Act. It has become common, as a result, for federal courts to rely on MDL panels to consolidate state class actions in one district court for many pretrial matters. Settlement can then seem like a natural solution for resolving the consolidated cases, especially when the alternative, separate actions or sub-classes almost guarantees confusing trials. Courts, however, have struggled to balance the gains of settling a case efficiently against the need to protect absent class members.

This decision is likely to empower objectors, who can use the case to argue that differences in state laws prevent certification without having the burden of proving up those differences. Yet, it may also provide additional relief to consumers in states with relatively generous consumer protection laws.

For class counsel looking to certify a settlement class, the key lesson from the Ninth Circuit’s decision is the need to consider choice-of-law issues from the beginning of a case and to think strategically about whether to oppose certification and on what grounds. “It is always frustrating to feel like a case is being decided on an issue that has not been argued before. The lesson, though, for litigators in nationwide class actions is that you have to consider state law issues,” concludes Burke.

 

Stephen Carr is a contributing editor for Litigation News.


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