A seemingly innocuous recruitment text message from the United States Navy has led to the official unraveling of a tactic long-used and widely-favored by defendants to escape a class action lawsuit before class certification. In a 6-3 decision, the United States Supreme Court rejected the argument that an unaccepted settlement offer or offer of judgment moots a plaintiff’s claim and thus a class action as well.

Background and Procedural History

In Campbell-Ewald Company v. Gomez, Petitioner, Campbell-Ewald Company, was retained by the United States Navy to conduct a multimedia recruitment campaign aimed at young adults. One branch of this campaign included sending text messages to potential recruits encouraging them to consider the Navy. The Navy approved the text messages as long as they were only sent to those who “opted-in” to receive marketing materials.

Campbell then contracted with another company, Mindmatics LLC, to identify cell-phone users between 18 and 24 years old who had consented to receiving text messages from the Navy. In May of 2006, Mindmatics transmitted the Navy’s recruitment text to over 100,000 recipients.

One of those recipients was the Respondent, Jose Gomez. Gomez was, at the time, a 40-year-old man who had not consented to receiving text messages from the Navy. Gomez alleged that Campbell violated the Telephone Consumer Protection Act (TCPA), which “prohibits any person, absent the prior express consent of a telephone-call recipient, from “mak[ing] any call . . . using any automatic telephone dialing system . . . to any telephone number assigned to a paging service [or] cellular telephone service.” 47 U.S.C. §227(b)(1)(A)(iii).

Gomez filed a class action complaint in the District Court for the Central District of California seeking treble and statutory damages, costs, and attorney’s fees, as well as an injunction against Campbell’s involvement in unsolicited messaging.  Prior to the deadline for filing a motion for class certification, Campbell made a Rule 68 offer of judgment that included paying Gomez his costs excluding attorneys’ fees, $1,503 per message received and an injunction which barred Campbell from sending text messages in violation of the TCPA, but denied any liability. Gomez did not accept the offer. Before Gomez filed his motion for class certification, Campbell filed a motion to dismiss, arguing the district court lacked subject matter jurisdiction over the matter since no case or controversy remained now that Gomez had been provided with complete relief for his injury, and thus the putative class claims also became moot. The district court denied the motion.

Campbell subsequently filed a motion for summary judgment, arguing the U.S. Navy enjoys sovereign immunity from the TCPA and that as a contractor for the Navy, Campbell acquired that immunity. The district court agreed and dismissed the case. The Ninth Circuit Court of Appeals reversed the lower court, holding that Campbell was not entitled to sovereign immunity and that an unaccepted Rule 68 offer of judgment does not moot an individual claim or a class action. The Supreme Court granted certiorari to settle a disagreement amongst the courts of appeals as to whether a Rule 68 offer of judgment does or does not moot a plaintiff’s claim.

The Supreme Court Opinion

Adopting Justice Kagan’s reasoning from her dissenting opinion in Genesis HealthCare Corp. v. Symczyk (in which the Court reserved the issue of whether an offer of judgment moots a claim) the Court found that, “[w]hen a plaintiff rejects such an offer—however good the terms—her interest in the lawsuit remains just what it was before. And so too does the court’s ability to grant her relief. An unaccepted settlement offer—like any unaccepted contract offer—is a legal nullity, with no operative effect.”

The Court further reasoned that once the offer expired, the parties remained adversaries, as both retained the same stake in the litigation they had at the outset. The Court noted that Rule 68 provides that an unaccepted offer is only admissible when determining costs, and for no other reason.

Since Gomez’s individual claim still stood, the Court ruled “a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted.”

Of note, however, is the caveat offered by the Court at the end of its analysis, in which it reserves ruling on a hypothetical situation in which “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.”

The Court also rejected Campbell’s sovereign immunity argument, determining that it did not follow the Navy’s implicit instructions to confirm the messages complied with the TCPA.

Conclusion and Implications

The Supreme Court’s ruling settles once and for all the effect of an unaccepted Rule 68 offer of judgment or settlement offer on a plaintiff’s claim. However, the Court appears to have left the door cracked for defendants via its unanswered hypothetical on the possibility of depositing the full amount of plaintiff’s claim into a bank account payable to the plaintiff. While it is unclear how the Court would rule in such a case, it will not likely be long before a defendant tests the waters.

WebinarOn Tuesday, May 26, 2015 at 12:00 p.m. Central, Jason P. Stiehl, Giovanna A. Ferrari and Jordan P. Vick will present the first installment of the 2015 Class Action Webinar series. They will provide a summary of key decisions from 2014, identify key trends for companies to watch for in 2015, as well as practical “best practices” and risk management for the future.

In 2014, companies saw a major change in the focus and risk of class action litigation. According to one industry survey, the percentage of class actions qualifying as “high risk” or “bet-the-company” tripled from 4.5 percent to 16.4 percent. This no doubt derives from the increase in volume of large settlements and continued increase in volume of suits under statutes with minimum statutory penalties, such as the Telephone Consumer Protection Act (TCPA).

The webinar will be provide insight on:

  • The landscape for in-house counsel, including identifying the legal market spend and risk for class actions
  • Case law and trends from 2014, including:
    • evolving class certification standards post-Comcast
    • increased scrutiny of class settlements
    • continued TCPA filings and large settlements
    • post-Concepcion waiver decisions and the CFPB’s arbitration study
    • standing and privacy/data breach cases
  • Highlights from 2015, including:
    • increase use of motion to strike class allegations
    • CAFA challenges
    • TCPA decisions
    • DirecTV Supreme Court arbitration case
    • International expansion of class action vehicle in Europe
  • Practical considerations and takeaways

register

Registration: there is no cost to attend this program, however, registration is required.

*CLE Credit for this webinar has been awarded in the following states: CA, IL, NJ and NY. CLE Credit is pending for GA, TX and VA. Please note that in order to receive full credit for attending this webinar, the registrant must be present for the entire session.

If you have any questions, please contact events@seyfarth.com.

By Robert B. Milligan and Christina F. Jackson

Plaintiffs’ attorneys have increasingly filed consumer class actions in California seeking to apply the state’s privacy laws to routine communications between businesses and their customers. If a company records or monitors inbound or outbound telephone calls with customers for calls made to or received by someone located in California, it runs the risk of violating California’s call recording and monitoring laws, which have become enticing to the plaintiffs’ consumer class action bar.

A recent California appellate decision, Kight v. CashCall, Inc., will make it more difficult for plaintiffs to obtain class certification in such cases. Case No. D063363, 4th Appellate Dist., 1st Div. 2014.

Background

Nearly 100 cases have been filed in the last year alleging that companies violated the California Invasion of Privacy Act by failing to inform customers that their inbound or outbound telephone calls were being recorded or monitored.

The CIPA prohibits the intentional recording or eavesdropping of telephone calls without the consent of all parties. Eleven other states also prohibit call recording without the consent of both parties to a telephone call: Connecticut, Delaware, Florida, Illinois, Maryland, Massachusetts, Montana, Nevada, New Hampshire, Pennsylvania and Washington.

The CIPA imposes both criminal and civil liability for violators of the statute. For private causes of action, there is arguably no requirement that the plaintiff suffer actual damages. In particular, there is a $5,000 penalty for each violation of California Penal Code section 632. These penalties can quickly accrue as companies who may record or monitor hundreds, if not thousands, of calls each week could be potentially liable for millions of dollars in penalties.

Section 632 prohibits the intentional recording or eavesdropping of a confidential communication without the consent of all parties to the confidential communication.

The California Appellate Court’s Decision

In Kight v. CashCall, Inc., a California Appellate Court affirmed a trial court’s order decertifying a putative class action in a case alleging violations of California Penal Code section 632.  The appellate court held that trial court did not abuse its discretion in finding that “individual issues regarding the individual putative class members’ ‘objectively reasonable expectation of privacy’ predominate over defendant’s alleged uniform policies.” (Slip Op. at 14-15).

In the case, a small group of CashCall borrowers brought a putative class action against the company alleging the unlawful monitoring of telephone conversations. CashCall’s decertification motion argued that numerous individual factual issues relevant to the confidential-communications issue demonstrated that liability on the section 632 claim “cannot be resolved on a class-wide basis.” CashCall focused on the circumstances surrounding each of the named plaintiff’s telephone conversations with CashCall employees and demonstrated that each plaintiff had different experiences regarding “the timing, extent, and nature of the monitored calls and of the call monitoring disclosure, and had different prior experiences with business communications.” (Slip Op. at 13).

CashCall argued that section 632 prohibits eavesdropping only “without the consent” of all parties, and that “[t]he issue of consent cannot be determined on a class-wide basis,” particularly regarding the inbound-caller class members because they may have heard the monitoring disclosure at the outset of call. CashCall argued the “case would quickly splinter into more than 500 mini-trials” and “would be riddled with administrative burdens and complexities that defeat the purpose of the class action mechanism.”  (Slip Op. at 14).

Seeking to overturn the trial’s court decertification order, Plaintiffs argued that the court erred in concluding that individual issues existed regarding whether there was a “confidential communication” within the meaning of section 632 that precluded class action treatment. Plaintiffs argued that common issues predominated because it was undisputed that CashCall secretly monitored more than 500 calls, and no outbound-caller class member received the call monitoring disclosure during the telephone conversation. Plaintiffs argued that whether inbound-caller class members heard the monitoring disclosure during or before the monitored inbound call could be determined on “question and answer forms.”  (Slip Op. at 14).

The appellate court ruled that there were individual fact issues critical to resolving the issue of liability: “although each plaintiff declared that he or she did not believe anyone was listening to their monitored calls with CashCall employees, the trier of fact would have to determine whether a person under the particular circumstances and given the background and experience of each plaintiff would have understood that the particular call was not being monitored.” (Slip Op. at 23).  Instead of relying upon “question and answer forms,” the court found that cross-examination must be permitted, to determine whether each monitored telephone call was a confidential communication subject to section 632’s statutory prohibition.

The court ruled that under section 632, the defendant has the right to litigate the issue of each class member’s consent and each class member’s claimed objectively reasonable expectation that the call was not being monitored. The appellate court reasoned that although “there remain certain common questions—including whether CashCall monitored the calls and the timing of the Call Monitoring Disclosures—the [trial] court acted within its discretion in finding these questions pale in terms of factual complexity and scope when compared with the significant individual questions regarding liability.” (Slip Op. at 26).  The appellate court also found that there were significant individual issues regarding each plaintiff’s reasonable expectations that the conversation would not be overheard or recorded.

Implications

While this decision will help defeat class certifications motions brought under section 632, it remains to be seen whether it will be useful in defending against Section 632.7 claims. Section 632.7 prohibits the recording or monitoring of calls involving cellular or cordless phones and there is no requirement that the communications be confidential.

In this emerging area, sensible business leaders should seek advice from competent counsel to ensure that their call monitoring and recording practices comply with applicable law.

The Third Circuit recently ruled in Grandalski v. Quest Diagnostics, Inc., that the common law claims in a nationwide class action were not appropriate for class treatment because the court would be required to conduct an individual analysis and application of each state’s law and therefore common questions of law did not predominate.   767 F.3d 175 (3d Cir. 2014).

Background

Plaintiffs in Grandalski, a group of patients, filed a putative class action alleging that Quest Diagnostics, Inc. routinely overbilled patients.  Id. at 177.  Plaintiffs proposed two nationwide litigation classes and asserted multiple causes of action against both classes including a state law claim for consumer fraud.  Id. at 178.  Plaintiffs moved for class certification on all its claims for both its nationwide classes.  Id. 

The Third Circuit’s Decision

When faced with a nationwide class action alleging state law claims, courts must engage in a choice of law analysis to determine what state law should be used to substantively decide the legal issues.  Consistent with choice of law tenets, courts apply the choice of law rules of the forum state to determine the controlling law.  Applying New Jerseys conflicts of laws, the Grandalski court found that these factors weighed in favor of applying the laws of the putative class members’ home state law because the plaintiffs received and acted in reliance on the representation in their home state.  Id. at 182.  Accordingly, the consumer fraud laws of several states would have to be analyzed and applied to resolve the plaintiffs’ consumer fraud claim on a class wide basis.

After determining that the laws of several states would need to be applied, the Grandalski Court considered whether plaintiffs’ claim were appropriate for class treatment pursuant to Federal Rule of Civil Procedure 23.  The Grandalski court determined that “class litigation involving dozens of state consumer fraud laws was not viable and that common facts and common course of conduct did not predominate.”  Id. at 184.  Accordingly, the court affirmed the district court’s denial of certification as to the state law consumer fraud claims.  Id.

The plaintiffs in Grandalski proposed grouping together the laws of various states as an alternative to denying certification, however, the court found that the plaintiffs failed to demonstrate how the grouping it proposed would apply to the facts and issues presented in the case and failed to meet their burden of demonstrating that grouping was warranted and workable.  Id. at 183.  The court noted that this was a heavy burden and that in cases where a grouping proposal was accepted the plaintiff set for a comprehensive analysis of the various states’ laws potentially applicable and how the proposed grouping would work and no such analysis was provided by plaintiffs.  Id. (citations omitted).  Because plaintiffs “provided no indication as to how the jury could be charged in some coherent manner” relative to the proposed grouping and instead asserted only that the differences between the state laws within each group were “insignificant or non-existent,” the court rejected the proposed grouping.  Id. at 183-84.

Implications

Grandalski adds to the growing trend among federal courts which have ruled that the predominance and superiority requirements of Rule 23 cannot be met where the substantive law of several different states would need to be applied.  It also reaffirms that plaintiffs bear a heavy burden to articulate alternative frameworks, such as grouping, in order to stave off denial of class certification.  In this way, Grandalski and several other federal courts have raised the bar for plaintiffs seeking class certification as they have become increasingly more focused on the manageability of a class action where multiple state laws are at issue.

The Illinois Supreme Court recently granted a Petition for Leave to Appeal in Price v. Phillip Morris, Inc., after the Illinois Appellate Court for the Fifth District effectively reinstated a $10 Billion verdict against Philip Morris from 2003.  9 N.E.3d 599 (5th Dist. 2014).  The Illinois Supreme Court’s decision to once again weigh in on the case sets the stage for a substantive analysis of class actions and damages awards under the Illinois Consumer Fraud and Deceptive Business Practices Act, codified at 815 Ill. Comp. Stat. 505, et seq. (“Consumer Fraud Act”).

Background

In 2000, plaintiffs Sharon Price and Michael Fruth filed a class action in the Circuit Court of Madison County, Illinois against Philip Morris, Inc., alleging that it had violated the Consumer Fraud Act by fraudulently advertising its cigarettes as “light” or “low tar,” when in fact they were higher in tar and nicotine than represented and more toxic than regular cigarettes.  219 Ill. 2d. 182, 210 (Ill. 2005).  Plaintiffs did not seek damages for any alleged adverse health effects caused by Phillip Morris cigarettes but for economic damages resulting from their purchase of the product in reliance on statements which they contended were fraudulent, deceptive and unfair.  Id. at 209.

Philip Morris alleged several affirmative defenses, including one based on section 10(b) of the Consumer Fraud Act, which bars suits based on actions “specifically authorized by laws administered by any regulatory body.”   815 Ill. Comp. Stat. 505/10(b)(1).  According to Philip Morris, the Federal Trade Commission (FTC) had authorized the use of the terms “light” and “low tar” (“FTC Defense”).  219 Ill. 2d. at 215-16.

The trial court certified a class of over one million Illinois consumers who had purchased cigarettes over three decades, from 1971 to 2001.  Id. at 211-12.  The case proceeded to trial and in March 2003, the trial court awarded plaintiffs over $7 billion in actual damages and $3 billion in punitive damages.  Id. at 230-32.  In doing so, the trial court ruled that the FTC had never specifically authorized the use of the terms “light” and “low tar.”  Id. at 230-31.

On appeal, Philip Morris argued that the trial court erred by, among other things, rejecting its FTC Defense, in certifying the class and awarding damages under the model presented by Plaintiffs at trial.  Id. at 233.

In December 2005, the Illinois Supreme Court reversed the trial court’s decision, ruling that the FTC had in fact approved the use of the terms “light” and “low tar” by entering into various consent decrees in other lawsuits against cigarette manufacturers and, therefore, that the lawsuit was barred.  Id. at 265-66, 272.  The Court also expressed “grave reservations” regarding the trial court’s decision to certify the class, the proof offered by Plaintiffs at trial, and the Plaintiffs’ novel damages theory but did not actually rule on those issues.  Id. at 267-71.

In June 2008, the FTC filed an amicus brief in a case involving Philip Morris parent company, Altria Group, which was pending before the United States Supreme Court.  See Altria Grp., Inc. v. Good, 555 U.S. 70 (2008).  In its amicus brief, the FTC disavowed ever having adopted a policy authorizing the use of “light” and “low tar” descriptors.  Id. at  87.  Further, in December 2008, the FTC rescinded prior guidance it had issued regarding statements concerning the tar and nicotine yields of cigarettes, clarified that it had not defined or authorized the terms “light” or “low tar,” and stated that a manufacturer’s continued use of those terms would be subject to prohibitions against deceptive acts and practices.  9 N.E.3d at 603, 608.

Based on these new statements from the FTC, which contradicted the Illinois Supreme Court’s interpretation of FTC policy, Plaintiffs filed a petition for relief from judgment (“Petition”).  Id. at 603.  After extensive litigation concerning the timeliness of the Petition, the Plaintiffs were permitted to pursue relief from the judgment against them.    Id.   The trial court, however, ultimately denied the Petition.  It ruled that while Plaintiffs had a meritorious claim in the underlying litigation, and that the Illinois Supreme Court likely would have ruled differently in 2005 on the issue of the FTC Defense, the Supreme Court was “equally as likely” to have ruled against Plaintiffs on other issues raised on appeal, such as class certification and damages.  Id. at 604.

In April 2014, the Illinois Appellate Court reversed the trial court’s denial of the Petition, effectively reinstating the $10B verdict against Phillip Morris.  Id. at 614.  On September 24, 2014, the Illinois Supreme Court granted Philip Morris’s petition for leave to appeal.

Implications

There is no doubt that the Illinois Supreme Court’s decision to review this case once again will have a profound impact on Illinois consumers, Philip Morris and litigation against tobacco manufacturers.  But the reach of the Illinois Supreme Court’s ultimate decision in this case will likely extend beyond that.

Many states have consumer fraud statutes similar to that of Illinois and the Illinois Supreme Court’s decision could therefore provide a model for class action litigation brought under different states’ statutes.   It is very likely that the Court will now address the merits of issues it previously tabled, such as the propriety of certifying such a large and diverse class of people (which covered over one million individuals and spanned purchases made in three decades), the feasibility of using consumer fraud statutes in consumer class action litigation (a proposition which has been questioned by several courts), the proof required to sustain such an action, and how damages are to be determined if and when such cases are proved.

We will keep you posted on the developments in this landmark case.

Summary

California Penal Code Section 632 has provided a springboard to litigation related to the recording of telephone calls in the State of California.  Last week, in Hatisihi v. First American, Case No. B244769 (Cal. Ct. App. 2d Dist.), the California Court of Appeal affirmed the recent trend of class certification denials in cases brought under Section 632, based upon the individualized inquires into a determination of whether the communication recorded was “confidential.”

Background Facts

First American issues one-year home warranty plans for major home systems and appliances to customers in 46 states, including California.  Customers may make warranty claims by calling an “800” number (“inbound” calls).  In addition, First American makes calls to existing customers as part of marketing and warranty renewal campaigns (“outbound” calls).  All calls between First American — whether inbound or outbound  — are recorded.  Inbound calls include an automated disclosure that the call may be monitored or recorded.  Outbound calls, however, do not include any such automated disclosure, and, prior to 2009, First American did not have a policy of requiring sales representatives to advise customers that the call may be monitored or recorded.  Id. at *2-4.

Plaintiff purchased a one-year First American Warranty in 2005 and renewed it annually for the next three years until it expired in May 2009.  Between 2005 and May 2008, Plaintiff admitted to making approximately 12 inbound calls to First American during which she received the automated disclosure that her call may be monitored or recorded.  Plaintiff also admitted that she participated in “dozens” of telephone calls with other companies where she understood her call would be recorded or monitored for quality assurance.  Plaintiff did not object to any of the inbound calls with First American or the other companies being recorded.  Id.

In May 2008 and May 2009, Plaintiff received outbound calls from First American’s sales group.  Both calls were recorded and Plaintiff was not given the disclosure that the calls would be recorded or monitored.  Id.

The Lower Court’s Opinion

Thereafter, Plaintiff filed a class action complaint entitled Hataishi v. First American (Los Angeles County Super. Ct. Case No. B244769) against First American for statutory invasion of privacy under California Penal Code Section 632, which prohibits the intentional recording of a “confidential communication” without the consent of all parties to the communication.  Plaintiff filed a class certification motion seeking to certify a class of California consumers who received telephone calls from First American between 2006 and 2009.  Plaintiff asserted that there were common issues of law and fact because: (1) First American was the only defendant; (2) First American’s policy was to record all outbound calls; (3) the outbound calls were not proceeded by an automated warning that the call would be recorded; and (4) prior to 2009, First American did not have a policy requiring its sales persons to give a verbal warning that the call would be recorded.  The trial court denied the motion finding, among other things, that individual issues predominated.  The trial court also rejected Plaintiff’s contention that the objective reasonableness of each plaintiff’s expectations could be assessed by First American’s uniform call recording procedures.  Id. at *6.

The Court of Appeal Affirms Denial of Class Certification

On February 21, 2014, the California Court of Appeal Second Appellate District, addressing only the community of interest issue, affirmed.  The Court of Appeal explained that a communication is “confidential” for purposes of Section 632 if the party has an objectively reasonable expectation that the conversation is not being overheard or recorded.  Accordingly, in order to establish that an outbound First American call was subject to Section 632, Plaintiff would need to prove the objective reasonableness of her expectation that the call would not be recorded and the objective reasonableness of each putative class members’ expectations of the same.  This required individualized proof of (1) the length of the customer relationship, (2) the plaintiffs’ prior experiences with calls to or from the defendant including the number of calls and whether or not those calls included a recording/monitoring disclaimer, and (3) the plaintiffs’ prior experiences with other companies wherein they were provided the recording/monitoring disclaimer.  Such individualized inquiry precluded the certification of Plaintiff’s class claims especially considering her admissions regarding inbound calls to First American and calls from other businesses wherein the recording/monitoring disclaimer was provided.    Id. at *14-15.

Significance

In recent years, plaintiffs’ lawyers have used, and, arguably, abused, section 632 (and similar state and federal statutes), bringing harrowing class cases against corporations, then demanding large settlements for quick resolution.  The First American decision should hopefully limit the number of Section 632 class action claims filed in the future, and provides strong support for the denial of pending cases seeking class certification.  First American also provides a strong framework for mounting early dispositive challenges to cases brought under Section 632, and similar call recording statutes.

First off, Happy New Year to our Blog Readers. Thank you for your patronage last year and we look forward to another year rolling over the legal class action landscape together.

As you may have recognized, either in reading our blog or simply reading the paper, a vast majority of the consumer class docket last year across the country was stuffed with cases brought under the Telephone Consumer Protection Act (“TCPA”).  The decisions ran the gamut, from insurance coverage disputes to class certification issues to cy pres conflicts.  The past year also found increased traffic on the administrative side, with nearly a dozen petitions filed with the Federal Communications Commission seeking clarification and assistance in restraining the proliferation of class action litigation under the TCPA.  These petitions seek guidance on the hottest topics being litigated, including: (1) what constitutes an autodialer; (2) whether informational cell phone calls require prior written consent; (3) whether the Act applies to documents transmitted via the Internet; and (4) whether opt-out notices are required on faxes sent with prior express consent.

While this statute created a boom for creative plaintiff’s lawyers, its uncontrolled expansion across the country (watch out New York) has become a drain upon not only the defendants to those suits, but small businesses and even the government.  We have unfortunately witnessed at our firm lawsuits targeting “mom and pop” businesses, apparently brought by plaintiffs with hopes of striking gold through an insurance policy without exclusions.  Further, the Wall Street Journal reported last November that the TCPA has hindered the federal government from efficiently recovering approximately $120 million in unpaid taxes.

Fresh off the New Year, two separate cases are postured to allow the United Supreme Court to address several of pressing issues under the TCPA, as well as to perhaps add some common sense to the interpretation of the statute, as Judge Benitez of the Southern District did late last year.   See Chyba v. First Financial Asset Management, 12-cv-1721 (S.D.N.Y. Nov. 20, 2013).

First, in Turza v. Holtzman, the defendant has petitioned the United States Supreme Court on several bubbling issues, one of which, the availability of cy pres, may be enough to pique the interest of the sitting justices.  Turza is an attorney who sent facsimiles to a purchased list of contacts.  The faxes took the form of a newsletter called the “Daily Plan-It”, which provided industry news and generic legal advice to the recipients.  The bottom portion of the fax provided contact information for Turza.  The lower court found that the faxes were unsolicited advertisements and entered judgement against Turza for $4.2 million, ordering that 1/3 of that amount, or $1.4 million, be paid to the plaintiff’s counsel, with the remaining money constituting a common fund.  Any moneys not claimed, the court held, would be then paid to a cy pres legal aid clinic.  On appeal, the Seventh Circuit upheld the judgment, but remanded to the lower court, taking issue with the designation of the judgment as a common fund, as well as the cy pres designation, but, nonetheless, ordering the solo practitioner to turn over the $4.2 million in a court-maintained account until resolution of the issue on remand.  Turza has now appealed the decision to the United States Supreme Court, challenging not only the issues of the common fund and cy pres, but also the underlying decision related to the designation of the facsimile as an advertisement.  The petition is pending on the United States Supreme Court docket as Case No. 13-760.

Second, in Uesco Industries Inc. et al. v. Poolman of Wisconsin Inc, the plaintiff is seeking a direct appeal to the United States Supreme Court on denial of its motion for class certification.  In Uesco, the defendant was solicited by a marketing agency to utilize the services of that company to send facsimiles.  Ultimately, the defendant acquiesced, but provided explicit instruction on the types of industries it wanted to target.  According to the defendant, against those wishes, the marketing agency sent facsimiles to a larger group of companies, including the plaintiff.  Before the lower court, the defendant argued that no vicarious liability could attach to it, as the marketing company exceeded the scope of its authority.  On appeal, the First District reversed, holding that the express language of the statute, and controlling precedent, required the agent to act within its scope before the defendant could be liable under the TCPA.  The petition is on the United States Supreme Court’s docket as Case No. 13-771.

The new year brings new hope that somewhere, someone will add a pound of sense to the Cerberus-like statute.  In the meantime, we will continue to assist our clients in avoiding the many pitfalls the statute presents, as well as identifying creative solutions to resolving pending litigation.

In a decision handed down this week, a federal court in New Jersey did little to stem the tide of litigation under the Telephone Consumer Protection Act (“TCPA”).  Declining to follow New Jersey state court precedent, the district court held that claims based on the faxing of identical commercial advertisements met the requirements of Rule 23, including that class litigation is the superior mode of adjudication for such claims.  A & L Industries, Inc. d/b/a ACE Powder Coating v. P. Cipollini, Inc., No. 12-07598 (SRC) (D.N.J. Oct. 2, 2013).

Background

Plaintiff A & L Industries brought suit against P. Cipollini, Inc. for sending a commercial advertisement by fax in violation of the federal TCPA and its state counterpart, the New Jersey Junk Fax Statute.  Plaintiff sent the same fax, which advertised roofing services, to more than 4,500 recipients in September 2006.

Plaintiff moved for class certification only two days after filing suit, but the court held that it was premature, and denied the motion without prejudice.  (Slip Op. at 1.)  About seven months later, after discovery, Plaintiff moved once again to certify the class – this time successfully.

The District Court Opinion

In opposing class certification, Defendant argued only that a class action was not the superior manner in which to adjudicate a TCPA lawsuit.  Nevertheless, Judge Chesler acknowledged that the Court is obligated to independently consider whether the requirements of Rule 23 were met, and walked through each accordingly.  (Id. at 2.)

The Court easily dispensed of the numerosity requirement given the 4,500 recipients of the fax, and, like other courts to have addressed the issue, found that claims based on receipt of the identical advertisement faxed by the same entity around the same time will meet the commonality and typicality requirements of Rule 23(a).  (Id. at 4-6).  In considering predominance, the Court noted that since recipients of the fax were all gleaned from a list purchased from a third-party provider, there were not the same individualized issues regarding prior consent and pre-existing relationships that have played a role in other TCPA suits.  (Id. at 7-8.)

After making these findings, the Court considered Defendant’s sole argument – which it called the “nub” of the motion – that TCPA suits are best litigated individually rather than on a class basis.  (Id. at 8.)  Defendant argued that TCPA allows for relatively large statutory damages of $500 to $1500 per violation, and therefore litigation on a classwide basis was inferior to individual litigation in small claims court.  For support, Defendant relied on New Jersey state court decision Local Baking Products v. Kosher Bagel Munch, Inc., 23 A.3d 469 (N.J. App. Div. 2011), which held that TCPA suits are categorically inappropriate for class certification.  A key assumption in that case was that the $500 statutory damages award considerably exceeds any real damages suffered and therefore provides sufficient incentive for would-be plaintiffs to prosecute their claim in small claims court.  (Id. at 8-9.)

Judge Chesler disagreed, stating that the Court “is skeptical that the possibility of numerous individual suits deters TCPA violations as effectively as an aggregated class action.”  (Id. at 11.)  Judge Chesler relied on dictum from a Third Circuit holding in reaching this finding, stating that the Third Circuit found “that there is little reason to believe individual small claims court actions are actually more efficient than suits brought elsewhere – ‘plaintiffs can still face protracted litigation when they sue individually.’”  (Id. at 10.)   The Court also expressly noted that a number of federal courts had questioned the rationale of Local Baking, and the Court was obligated to follow federal precedent in interpreting a federal rule.  (Id. at 9.)

Implications

If would-be plaintiffs were previously hesitant in filing TCPA class action suits in New Jersey given the holding in Local Baking, this decision should remove any hesitation.  Plaintiffs can rely on Judge Chesler’s analysis in arguing that a collective action is the superior mode of adjudicating such claims even in the face of relatively high statutory damages.

The Circuits are split as to what effect an offer of judgment directed to a named plaintiff has on a putative class action.  The Seventh Circuit has taken a rigid view, holding that an unaccepted offer of judgment affording full relief to the named plaintiff renders a putative class action moot — unless there is already a motion for class certification on the docket.  The Second Circuit has yet to adopt or reject the rule, and, in an uncertain legal landscape, plaintiffs in putative class actions are strategizing to avoid the consequences of the Seventh Circuit holding.

Physicians Healthsource, Inc., v. Purdue Pharma L.P., et al, No. 3:12-cv-1208 (D. Conn. Sept. 6, 2013).

Background

Plaintiff Physicians Healthsource, Inc. filed a putative class action alleging violations of the Telephone Consumer Protection Act based on Purdue Pharma and its affiliates sending marketing materials by fax which did not contain the required opt-out notices.  Defendants moved to dismiss the litigation, but their motion was granted only in part, and the suit proceeded.

After failing to knock out the litigation through a motion to dismiss, any defendant would surely anticipate a motion seeking certification of the class in due course.  But Physicians Healthsource made a surprising move:  it filed a motion to certify the class before discovery had even begun.  (Slip Op. at 2.)

The District Court Opinion

In ruling on the motion for class certification, Judge Underhill began with a familiar recitation of black letter law.  To decide whether class certification is appropriate, the court must determine whether Rule 23(a)’s requirements of numerosity, commonality, typicality and adequacy are met, and plaintiff bears the burden of establishing the prerequisites by a preponderance of the evidence.  Slip Op. at 2-3.

The Court then explained that it could not fulfill its duty to rigorously analyze the requirements of Rule 23(a) because plaintiff filed its motion prior to discovery.  The Court noted that plaintiff conceded that more discovery was needed, but sought “leave to submit a memorandum of law … after it obtains discovery.”  Slip Op. 2 (emphasis in original).

Judge Underhill surmised that plaintiff was spooked into action by the recent Seventh Circuit decision holding that an unaccepted offer of judgment affording the named plaintiff full relief will render moot a putative class action unless there is a class certification motion on the docket.  See id. (citing Damasco v. Clearwire Corp., 662 F.3d 891, 896 (7th Cir. 2011)).  The Court noted that the Second Circuit has not adopted the rule, and other circuits have expressly rejected it.  Id.

The Court denied the motion, dismissing it as premature.  It noted, however, that even if a premature motion for certification will preserve plaintiff’s ability to pursue a putative class action in the face of an offer of judgment, there is no reason for the Court to allow an “under-developed motion” to “linger on the docket.”  Judge Underhill explained that orders granting or denying certification are “inherently tentative,” and the Court is free to modify such an order according to developments in the litigation.  The Court therefore denied Plaintiff’s motion for class certification without prejudice to renewal at a later date.

Implications

The Physicians Healthsource decision does not resolve whether the Second Circuit will follow the Seventh Circuit in adopting a rule that an unaccepted offer of judgment affording full relief to the named plaintiff will render a putative class action moot unless there is a motion for class certification on the docket.

Until the issue is expressly resolved by the Second Circuit, the Physicians Healthsource decision will encourage named plaintiffs to file for class certification at the earliest possible date, well before discovery allows development of a meaningful record.  If courts follow Judge Underhill’s example, there is no harm to plaintiff in filing a premature motion, and doing so will preserve their ability to ward off the consequences of the Seventh Circuit rule while also allowing them to later re-file for class certification on a full record.

On Thursday, August 22, 2013, the class actions brought by consumers alleging defective Sears washing machines survived another review by the Seventh Circuit after the U.S. Supreme Court remanded the class certification decision in light of Comcast v. Behrend, 133 S. Ct. 1426 (2013).

Factual Background

The lawsuit arises from alleged mold-causing defects in several models of washing machines. On November 13, 2012, the Seventh Circuit reversed the district court’s denial of class certification and sought to “clarify the concept of predominance in class action litigation.”  Butler v. Sears, Roebuck, and Co.,  Nos. 11-8029, 12-8030 (7th Cir. 2012).   In its opinion, the Seventh Circuit found that the fact that multiple washer models were at issue did not complicate the situation sufficiently to defeat the predominance requirement of Federal Rule of Civil Procedure 23(b)(3) “[P]redominance is a question of efficiency . . . . A class is the more efficient procedure for determining liability and damages in a case such as this involving a defect that may have imposed costs on tens of thousands of consumers, yet not a cost to any one of them large enough to justify the expense of an individual suit.”  Slip. Op. at 4. Accordingly, the Seventh Circuit found that the predominance requirement was satisfied and the class should be certified.

The U.S. Supreme Court granted Sears’ petition for certiorari.  On June 3, 2013, the Court vacated the Seventh Circuit’s decision and remanded the case for further consideration in light of Comcast.  

Comcast Opinion

Comcast involved an antitrust class action in which plaintiffs’ alleged that Comcast obtained a monopoly on cable services in certain regions via transactions with competitors to swap regional markets and thereby cluster their operations within a particular region.  A class of Comcast subscribers was certified based on one of four proposed antitrust impact theories, even though the damages model presented did not isolate any one antitrust impact theory from the others.  Affirming class certification, the Court of Appeals found that “an attack on the merits of the methodology had no place in the class certification inquiry” and, therefore, the damages model was sufficient for class certification purposes.

The Supreme Court, however, reversed the certification decision.  The Court rejected the Court of Appeals’ approach because, under that logic, “any method of measurement is acceptable so long as it can be applied classwide, no matter how arbitrary the measurements may be.”  Accordingly, the Court held that the model for damages must be able to measure damages specific to liability, even if that determination required the court to delve into the merits.  Because the damages model was not specific to the one remaining antitrust impact theory, class certification was not appropriate.

Seventh Circuit’s Consideration of Comcast

The Seventh Circuit reconsidered its class certification decision in light of Comcast but ultimately determined that the Comcast decision was of no moment.  See Butler v. Sears, Nos. 11-8029, 12-8030 (7th Cir. 2013).  The Seventh Circuit interpreted Comcast to hold that “a damages suit cannot be certified to proceed as a class action unless the damages sought are the result of the class-wide injury that the suit alleges.”  Slip Op. at  5.  Distinguishing Comcast, the Seventh Circuit found that there was no possibility that the damages could be attributed to an act of the defendants that was not challenged on a class-wide basis, i.e. the alleged defect in the washer.  The Seventh Circuit went on to point out that, unlike in Comcast, the class actions at issue were limited to liability determinations and damages issues may be resolved separately under Rule 23(c)(4) of the Federal Rules of Civil Procedure.

Accordingly, the Seventh Circuit declined to interpret Comcast so broadly as to require that all class members sustain the same damages, stating that such an interpretation, “would drive a stake through the heart of the class action device.” Id. at 9.    Thus, where issues of liability can be resolved through common proof, individual damages can be determined through other means.

Additionally, the Seventh Circuit addressed the predominance issues raised, referring to it as a “qualitative assessment” as opposed to “bean counting.”  Id. at 11.  In other words, even where there are several individualized issues, one issue central to the validity of the claim in a class action can justify class treatment.  Importantly, the Seventh Circuit found a central issue of liability, i.e., whether the washing machines were defective, sufficient to satisfy the predominance requirement and uphold the class certification.

Implications

The Seventh Circuit’s opinion strengthens the already well-established class certification principle that individualized damages determinations will not preclude class certification where liability can be determined on a class-wide basis.  Interestingly, the Court seems to suggest using Rule 23(c)(4) as the vehicle through which to avoid any predominance issues with individual questions of damages.  We will continue to track cases dealing with this issue and post updates on any new developments.