On January 10, 2018, the U.S. District Court for the Eastern District of Virginia denied Plaintiff Tiffanie Branch’s renewed motion for class certification in Branch v. Government Employees Insurance Company, No. 3:16-cv-1010, 2018 WL 358504 (E.D. Va. Jan. 10, 2018). In particular, the Court found that the facts underlying her allegations were too individualized and specific to merit class certification. Because of this deficiency, Branch failed to meet, among other criteria, the predominance criterion required by Rule 23(b)(3) of the Federal Rules of Civil Procedure. This post examines the interaction between predominance and Article III standing.

Background

In August 2016, Branch accepted a job offer with Defendant GEICO, contingent upon the results of a background check. The background report included a felony conviction that Branch had not disclosed on her application. GEICO preliminarily graded Branch’s report as “Fail” because of the conviction and then contacted Branch by phone. During the call, Branch explained that the conviction was a misdemeanor, not a felony. While Branch averred that GEICO had rescinded the job offer over the phone, GEICO maintained that it had advised her that she would receive a pre-adverse action letter with a copy of the background check and a summary of her rights, including instructions on how to dispute the background report. GEICO sent Branch the letter the next day, and later sent an adverse action letter, indicating that GEICO would not hire her.

On December 30, 2016, Branch filed a putative class action, alleging that GEICO’s hiring process violated section 1681(b)(3)(A) of the Fair Credit Reporting Act (“FCRA”). That section mandates that, prior to taking an adverse action upon a consumer report for employment purposes (such as a background check), the prospective employer must provide a copy of the consumer report and a disclosure of consumer rights. Branch alleged that GEICO’s act of grading applicants “Fail” was an final decision rather than a preliminary one and that thus the adverse action occurred before GEICO provided any notice to the applicant. Branch sought to certify a class of similarly situated individuals who sought employment from GEICO and had their background reports graded “Fail” before GEICO sent the individuals a copy of their reports and a summary of their rights.

In response, GEICO argued that its grading process was not final. GEICO defended that its policy and practice was to grade a background report, provide the applicant a pre-adverse action notice and an opportunity to dispute the report if it was graded “Fail,” and then take final action only after the cure period had expired. GEICO noted that about 25% of applicants graded “Fail” had their grades changed after disputing their background reports. GEICO argued that Branch could not show that common issues would predominate at trial because her claim turned on her individualized allegation that GEICO rescinded her job offer over the phone.

Class Certification: Predominance and Article III Standing

In addition to Rule 23(a)’s requirements for class certification—numerosity, commonality, typicality, and adequacy of representation—a class must also fit within one of the prescribed conditions of Rule 23(b). EQT Prod. Co. v. Adair, 764 F.3d 347, 357 (4th Cir. 2014). In this instance, Branch argued that her proposed class satisfied Rule 23(b)(3) because “questions of law or fact common to class members predominate over any questions affecting only individual members . . . .” Fed. R. Civ. P. 23(b)(3) (emphasis added).

The Court held that this argument failed in part because of Article III, which necessitated that Branch define her class in a way so that each member had standing. At a minimum, each member must have suffered an injury in fact to satisfy Article III standing. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992). The court reasoned that, as defined, the class left open the “possibility that some class members did not suffer injuries.” The court noted that it was not the designation of the “Fail” grade on an employment application in response to a criminal background check that created the adverse action in violation of FCRA. Rather, it was only if GEICO diverted from its hiring policy by immediately rescinding a job offer upon the “Fail” designation without a meaningful period to dispute the designation. In other words, the court explained, what purportedly happened to Branch did not necessarily happen to the absent class members. Consequently, the court held that this particularized inquiry “cause[d] individual injury issues to predominate,” sinking Branch’s attempt to certify her defined class.

Implications for Businesses

Businesses facing class action lawsuits should consider all options for defeating class certification. Although the United States Supreme Court has not yet decided whether each putative class member must have standing for a class to be certified, the courts of appeals and the district courts are giving greater scrutiny to this issue. Businesses should investigate claims early to see if there are differences between the named plaintiff and the individuals he or she seeks to represent. Even minor differences, if relevant, can defeat certification.

 

Back in March we wrote about the group of former unpaid interns from Gawker Media’s Manhattan office suing to recover back pay under the federal Fair Labor Standards Act (FLSA), and their desire to use social media to encourage plaintiffs to opt-in. After the Court ultimately denied their request, the plaintiffs submitted yet another  plan to the court to use social media to notify potential class members of the action. Social-Media-Icons

In an attempt to address the overbreadth problem that resulted in the denial of their request the previous month, plaintiffs proffered a more focused agenda to target interns eligible to “opt-in.”  Plaintiffs assert that they are unable to locate email or mailing addresses of the 55 known former Gawker interns, but 27 of them are known to have a Facebook or Twitter account and 16 have a LinkedIn account.  Plaintiffs asked to “follow” the former interns on Twitter, “friend” on Facebook, and “connect” on LinkedIn to allow them to send direct, private messages to the former interns regarding the class.  Plaintiffs similarly asked permission to email notices to certain individuals who applied for internships with Gawker Media, but not necessarily hired, blaming Gawker for its failure to keep accurate records of names and contact information of the interns.

Not surprisingly, defendant Gawker objected to two main aspects of the revised plan claiming that the class plaintiffs failed to identify any effort “to correlate application emails with the emails to and from actual interns that also have been produced” by Gawker.  Gawker insisted that plaintiffs’ proposed plan was inherently overbroad and likely to solicit individuals having no interest in the litigation.

On April 10, 2015, the Court split the baby.  The Court granted plaintiffs’ renewed and revised application for it to disseminate notice of the action via social media, subject to the “prudent limitations” expressed by Gawker.  (Apr. 10, 2015 Order, Dkt. 125.)  Pursuant to the order, plaintiffs are able to publish notice to former Gawker interns as requested, but are denied the ability to reach out to internship applicants who never actually became Gawker interns.  The Court commented that notice should only be sent to those who can raise a claim—thus, if never a Gawker intern, then no claim under FLSA exists in this action.

Further, the opt-in period for the class is set to close on April 14, 2015.  Plaintiffs were ordered to “unfollow” any interns on Twitter, unless the individual chose to opt-in to the class.  Next, plaintiffs are prohibited from sending friend requests to individuals on Facebook, to avoid the “misleading impression” of the individual’s relationship with Plaintiffs’ counsel. The Court remarked that the revised plan ensured Plaintiffs’ use of social-media notice complied with the general principle governing FLSA opt-in notices.  (Dkt. 125 at 2.)

Implications

The Court recognizes the convenience and allure of social media in the context of notifying class members, but any attempt to publish “notice” via social media must be narrowly tailored to ensure that actual interested parties are notified.  Any plan beyond informing eligible plaintiffs to opt-in to a collective action, will likely receive intense scrutiny by a Court.

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.

Regardless of whether a class is opt-in or opt-out, providing class notice is a challenge.  As technology evolves, so does the ability to reach class members who would otherwise be unreachable.  But as attorneys increasingly seek to utilize non-traditional methods of class notification, such as Facebook, Twitter and LinkedIn, courts have struggled to draw appropriate limits.  Two recent decisions illustrate this.Social-Media-Icons

Recent Developments

In Mark, et al. v. Gawker Media LLC, et al, group of the website’s former unpaid interns in Gawker’s Manhattan office are seeking to recover back pay under the federal Fair Labor Standards Act (FLSA).   See Mark, et al. v. Gawker Media LLC, et al., Case No. 13-cv-04347 (See Nov. 3, 2014 Order, Dkt. 80).  Plaintiffs’ Counsel requested permission to use social media to encourage putative class members to opt-in.  Social media, plaintiffs’ argued, had the potential to solve the problem of trying to reach a “transient and highly mobile” group of individuals who “were likely to have changed addresses and dispersed throughout the country since their internships.”  (Order at 1-2).

Gawker vigorously opposed this request, presumptively fearing a swarm of bad publicity. The court initially entertained the plaintiffs’ request but, after reviewing plaintiffs’ proposed notice plan, refused to allow plaintiffs from proceeding, finding that  “Plaintiffs’ proposal to post notices on websites such as Reddit and Tumblr — and on pages such as ‘r/OccupyWallStreet’ and ‘r/Progressive’– lacks any realistic notion of specifically targeting its notice to individuals with opt-in rights, and instead would call attention to the lawsuit mostly of individuals with no material connection to the lawsuit whatsoever.”  The Court explained that it had contemplated using social media to send “private, personalized notifications,” “not to advertise the alleged violations by Defendants.”  (See Mar. 5, 2015 Order, Dkt. 100.)

In Fitzgerald Farms, LLC, et al. v. Chesapeake Operating, Inc., the parties reached a $119 settlement in case alleging that Chesapeake underpaid gas and oil royalties to landowners.   (See Case No. CJ-10-38, District Court of Beaver County, Oklahoma.)  In an attempt to encourage plaintiffs’ to opt out, a local Fort Worth lawyer launched a “Royalty Ripoff” publicity campaign, using billboards, websites and social media to convey his message that “This settlement stinks.”

Hoping to preserve the settlement, Plaintiffs’ counsel filed for a temporary restraining order to prohibit the dissenter from using mass media to encourage class members to opt-out.  They argued that his campaign to dismantle the settlement was a thinly veiled attempt to conduct an “unethical solicitation campaign.”  While the court initially granted Plaintiffs’ motion and enjoined the dissenter, it later dissolved the injunction in response to the dissenter’s claims that his First Amendment rights were being violated.

Implications

Social media is a game-changer for parties to a class action.  Its ability to effectively reach class members who would otherwise be unreachable cannot be disputed.  However, the use of social media in the class notice context also creates several concerns for the courts, who have been wary of moving away from traditional, mailed notice.  As we recently commented to Bloomberg News, courts have and will continue to struggle with balancing the desire to create awareness among putative plaintiffs against other legitimate concerns innate to using social media for class notice, such as the desire to preserve settlements, damage to defendants’ reputation, the potential of attracting imposters, and attorneys’ ethical limits.

The Seventh Circuit Court of Appeals recently invalidated a nationwide settlement agreement covering six consumer fraud class actions (“Settlement Agreement”) brought against NBTY, Inc., Rexall Sundown, Inc., and Target Corporation (“Defendants”).  See Pearson v. NBTY, Inc., No. 14-1198 (decided Nov. 19, 2014).  Each case was premised on Defendants’ allegedly deceptive marketing and sale of glucosamine supplements, which are marketed as promoting joint health.

Background

Defendants are in the business of marketing, selling, and distributing a line of joint-health dietary supplements, the active ingredient of which was glucosamine. Plaintiffs sued after they purchased and allegedly used the dietary supplements as directed but did not experience any of the promised health benefits as represented on the packaging.  (See Case No. 11-7975 (N.D. Ill.), Jan. 3, 2014 Mem. Op. & Order at 2, Dkt. No. 143).   Plaintiffs also claimed that they later learned of several studies which suggested that glucosamine was ineffective at relieving or curing joint related ailments. (Id.)  Plaintiffs sought damages in the amount of the purchase price of the products.

On April 15, 2013, the parties executed the Settlement Agreement, which covered approximately 12 million class members and provided for a total fund of $20.2 Million, only $2M of which was guaranteed to be paid to class members.  (Id. at 6).  On the other hand, $4.5 Million was guaranteed to class counsel for their fees.  (Id.)  The balance, less notice and administrative costs, would revert to defendants.  Theoretically, each class member could receive $3 for an undocumented purchase and $50 for a documented purchase.  (Id.)  As is common in consumer class actions with individual relief of small value, however, the settlement resulted in a very low claim rate.  (Id. at 14).  As of the claims deadline, only 0.25% of the proposed settlement class returned claims, totaling $865,284 (Id. at 14).  The remaining $1,134,716 of the guaranteed fund of $2M was to be remitted in cy pres to an educational foundation.  (Id.).

When Plaintiffs’ moved for Final Approval, certain class members objected, arguing that the settlement agreement was not “fair, adequate and reasonable” within the meaning of Federal Rule of Civil Procedure 23(h) given that class members was receiving less than $1 Million dollars, approximately 4% of the settlement fund, while class counsel was receiving $4.5 Million. (Id. at 9.)

On January 3, 2014, the District Court for the Northern District of Illinois approved the final settlement but reduced the attorneys’ fees to $1.9 Million.  (Id. at 18).  The objectors then appealed to the Seventh Circuit.

Appellate Review

The objectors’ opening brief asserts that “[t]he self-dealing here not only included a disproportionate fee, but a clear sailing agreement and a segregated fund for the proposed attorneys’ fees that would revert to the defendant here rather than the class.”  (Opening Brief of Appellants at 18.)  The objectors argued that this unfairly insulated the fee request from scrutiny and forced them to object to the settlement in order to challenge the fee award.  (Id.)  Appellants maintained that, while in hindsight the fee award exceeded the benefit to the class, that did not make the settlement per se unfair or show collusion or self-dealing.  (Response Brief at 20-23.)

During oral argument, the Panel made clear that they had grave concerns about the $4.5 million in fees requested by plaintiffs’ attorneys and whether there was collusion.  Judge Posner commented that the settlement claim form and informational website were “extremely confusing” for a $3 refund on a product that averaged around $20 per bottle and suggested that the forms were clearly designed “to discourage people from applying.” Similarly, Judge Rovner questioned the propriety of making class members attest, under penalty of perjury, as to what month they bought a bottle of pills years after their purchase of the product.

As expected, on November 19, 2014, the Seventh Circuit reversed the district court’s confirmation of the settlement, which it described as a “selfish deal between class counsel and the defendants.”  (Slip Op. at 18).  Judge Posner mocked class counsel for shedding “crocodile tears over Rexall’s misrepresentations” to class members and then turning around and agreeing to a settlement that actually “disserves the class” in order to maximize their award of attorneys’ fees.   (Id.)

Taking a brutal view of class settlement negotiations, the court explained how counsel for both sides often has an incentive to make the claim forms as burdensome as possible to minimize the claims rate.  Like all defendants, Rexall had “no reason to care about the allocation of its cost of settlement between class counsel and class members; all it cares about as a rational maximizer of its net worth is the bottom line – how much the settlement is likely to cost.”  (Id. at 10).  The problem in this case was that class counsel too had an incentive to minimize class claims and therefore were agreeable to a more burdensome claims process, “because the fewer the claims, the more money Rexall would be willing to give class counsel to induce settlement.”  (Id.).

The Court also took aim at the Settlement Agreement’s reversion or “kicker clause” which provided that if the judge were to reduce the attorneys’ fees award, the savings would “enure not to the class but to the defendant.”  (Id. at 16).  The Seventh Circuit ruled that such a clause was “a gimmick for defeating objectors” and presumptively invalid.  (Id.)

The Court concluded that, “Class Counsel could have done much better by the class had they been willing to accept lower fees in their negotiation with Rexall. But realism requires recognition that probably all that class counsel really care about is their fees — for $865,284 spread over 12 million class members is only 7 cents apiece.”  (Id. at 10).

In order to mitigate the effect of such dynamics in the future, the Court ruled that the reasonableness of the attorneys’ fees allowed to class counsel should be judged against the “actual or at least reasonably foreseeable benefits to the class,” not the mere potential benefit.  (Id.).

Implications

The Seventh Circuit was unequivocal in its opinion that the settlement in this case did not come close to comporting with the fairness requirements of Fed. R. Civ. P. 23(h) due to the disparity between the plaintiffs’ attorneys’ fees award and the actual benefit to the class.  This and other recent federal court decisions indicate that judicial scrutiny of consumer class action settlements is growing.  Both defense and class counsel are encouraged to be mindful of the actual benefit to the class when negotiating the attorneys’ fee award and reversion provisions in class action settlements, or face the risk that the fairness of the settlement will be challenged.

Although defendants settle class actions to “buy peace” through class-wide releases, it is well-established that class releases will not be enforced in certain situations, such as when notice to the settlement class was constitutionally inadequate. In Hecht v. United Collection Bureau, 2012 U.S. App. LEXIS 17374 (2d Cir. Aug. 17, 2012), the Second Circuit recently highlighted that risk, finding that a class settlement did not bar a claim under the federal Fair Debt Collection Practices Act (“FDCPA”) because notice of the settlement solely through a single advertisement in USA Today was insufficient. While the general principle reiterated in Hecht is not new, the Second Circuit’s analysis of how much notice was required to satisfy due process in that case likely will discourage parties from settling class actions at least in some circumstances.

Case Background

Chana Hecht brought an individual FDCPA action against United Collection Bureau (“UCB”) based on allegations that UCB called her without disclosing its identity or stating that it was attempting to collect a debt. UCB successfully moved to dismiss the action as res judicata based on a prior class action settlement in Gravina v. United Collection Bureau (“Gravina”). There was no dispute that Hecht was a member of the Gravina class and did not opt out, or that the claims in Hecht’s individual case were identical to those released in Gravina.

The Gravina class was certified for settlement purposes under Federal Rule of Civil Procedure 12(b)(2). The settlement gave each named class representative $1,000, the maximum recovery for class representatives under the FDCPA, plus a $1,500 incentive award. The class was awarded $13,254, which the court found to be 1% of UCB’s net worth and therefore the maximum possible class recovery, distributed to charity as a cy pres payment. Class counsel received $90,000 in fees, and UCB was enjoined to “use its best efforts” to identify itself in and disclose the purpose of future debt collection calls. There were no objections to the settlement.

In opposing dismissal of her individual claim, Hecht argued that she was not bound by the class release inGravina because a single advertisement in USA Today did not satisfy due process. The district court rejected this argument, finding that additional notice was not reasonably practicable given that there were more than two million class members and the settlement amount was too small to justify a more expensive notice program.

The Second Circuit’s Decision

After noting that judgments in class actions do not bind absent class members “where to do so would violate due process,” the Second Circuit began its analysis by examining whether Hecht had any right to notice of the Gravina settlement. Citing the United States Supreme Court’s decisions in Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 (1985), and Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2558-59 (2011), the court found that notice and an opportunity to opt out of a settlement are required not only in cases brought “predominantly” for money damages, but also when a claim for money damages is more than “incidental.” In Gravina, the court held, the claim for monetary relief clearly did not predominate because the class was defined “as victims of a completed harm with no reference to ongoing injury or risk of future injury.” Indeed, the Gravina complaint did not even request injunctive relief, and only the damages remedy was available to the entire class. Notice therefore was constitutionally required.

The court then went on to consider whether the one-advertisement notice program was sufficient. It reiterated that notice must be “the best practicable, reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections” — not just a “mere gesture,” but rather a real, albeit reasonable, attempt to actually reach class members. Based on prior Second Circuit cases, the court opined that, while publication may be sufficient when class members cannot be identified through reasonable diligence, a single advertisement in one publication is unlikely to be sufficient if no other notice is given. Rather, multiple ads in multiple publications generally are required.

Most significantly, the Second Circuit rejected UCB’s argument “that the negligible amount of money to be awarded per person under the Gravina settlement justified lesser notice.” Noting the contrast between the $1000 in statutory damages available in an individual FDCPA action and the $500,000/1%-of-net-worth limitation on FDCPA class damages, the court expressed the view that “it was all the more important that Hecht receive adequate notice before being deprived of her individual right to sue.”

What Hecht Means

The notice program is a key deal point in every class action settlement, as each dollar spent on notice as a practical matter reduces the funds available for distribution to the class. Hecht should remind class action defendants that it rarely is in their interest to accept a weak notice program, as they are not really buying peace if their class-wide release is subject to collateral attack. While most class settlements include significantly more notice than a single USA Today ad, there are cases like Hecht in which a class settlement simply may not be possible without a very inexpensive notice program. In those cases, the limited dollars available must be used wisely, or the settlement may not be buying peace.