DELVACCA Inaugural In-House Counsel Conference April 1, 2009 Ezra D. Rosenberg Will Sachse Dechert LLP The New Class Action Game: “No Injury” Plaintiffs.

DELVACCA InauguralIn-House Counsel Conference

April 1, 2009

Ezra D. RosenbergWill SachseDechert LLP

The New Class Action Game:“No Injury” Plaintiffs

And Multi-District Litigation

“You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

“And if you’re not fooling all of the people all of the time, you can’t have a class action .”

“You can fool some of the people all the time, and those are the ones you want to concentrate on.”

“This concept may have some relevance to plaintiffs’ selection of forums in consumer fraud class actions.”

To MDL Or Not To MDL

• Jurisdiction and Venue– Pro: Removal of case from

plaintiffs’ hand-picked judge and/or venue

– Pro: May reduce plaintiff’s control of media in hand-picked venue, if not the same as MDL venue

– MDL judges are, on average, more experienced and somewhat more conservative, but that’s changing, as there are more MDL’s

– Con: But you might get worse


• Case Coordination:– Pro: Better coordination– Pro: Control over outliers– Pro: Interlocutory appeal

chances– Pro: Effect on costs and

budgets– Pro: Effect on settlement

– Con: Cases outside MDL continue

– Con: Costs


• Plaintiffs

– Pro: May create conflicts – Pro: Reduces renegade

problems

– Con: Attracts sophisticated counsel

– Con: Better plaintiffs’ coordination

– Con: Helps weaker counsel– Con: May save plaintiffs money– Con: May lead to more cases


• Courts

– Con: May send message that you’re willing to settle

– Con: May send subtle message to court that cases should be aggregated for trial or certified as classes


• Strategy– Pro or con: Magnifies the impact of pretrial rulings – Pro or con: Depends on which judge you get and

which Circuit you’re in


• Use and abuse of Master Consolidated Complaint– Administrative tool– Can’t supplant underlying complaints

• Have to know what complaint you’re moving against – Keeping eye on laws of different states– Improper narrowing of MDL into model claims– Improper deferral of class certification motions, when limiting motion to certain claims

Plaintiffs’ New Tacks

– Clump states into small number of groups, containing materially identical standards

– Hold back claims from class certification adjudication

•Violates precept that class certification decision be made at earliest opportunity

•Flies in face of purpose of MDL

Plaintiffs’ New Tacks

• Dangers of bellwether trials• Lexecon issues

– Attempts to circumvent Lexecon by teeing up first trial in MDL court

Effect Of “Choice Of Law”

• Which Circuit Court’s law will apply to class certification decision in MDL?

• Whose law will apply to substantive law?

Whose Law Of Class Certification Applies In MDL?

Judge Scheindlin, MTBE Litigation MDL:

– Not pretrial ruling, because can be reviewed up through trial

– Shouldn’t force trial court to try case it wouldn’t have certified

– Involves issues relating to state substantive law

– Law of transferor Circuit applies


• In re Live Concert Antitrust Litig., 241 F.R.D. 98, 105 (C.D. Cal. 2007)

•Reduction in efficiency of forcing court to apply divergent interpretations of federal law

•Law of transferee circuit applies, because pretrial proceeding, under section 1407


• In re Wal-Mart Wage and Hour Employment Practices Litig., 2008 WL 3179315 (D. Nev. June 20, 2008)

• First looked at law of transferee circuit (which was also a transferor circuit)

• Then looked at law of transferor circuits


• Strategic Considerations:– Be careful what

you wish for– May be better off

trying to move Circuit on underlying approach to class certification

Where Do You Want To Be?

• Which Circuit Court’s law will apply to class certification decision in MDL?– May affect position before MDL Panel– May affect outcome of case once in MDL


• Limited choice– Plaintiffs make the

first choice – But do not always

act in concert

• In absence of obvious choice, weigh all options


• No strict formula or predictability

• Factors:– where cases first filed– where locus of litigation

is– convenience of forum,

docket (regular docket and number of MDLs)

– availability of experienced judge

Not All Circuits Are The Same

• Circuits differ on outcome determinative issues relating to class certification:– Level of analysis of pleadings– Standard of proof– Trial Plan – Nature of proofs

• Admissible evidence• Daubert/Frye

– Issue Certification– Fluid Recovery

Whose Class Cert Law Do You Want?

• Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974): No preliminary inquiry into merits

• General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982): Rigorous inquiry

• Vast Majority of Courts Hear Evidence to Inform Their Certification Decision – Szabo (7th Circuit)

• 10th Circuit: Accept pleadings as true and limited evidence

The Third Circuit Changes The Game

•Trial court “must make whatever factual and legal inquiries are necessary and must consider all relevant evidence and arguments presented by the parties.”


• “The decision to certify a class calls for findings by the court, not merely a ‘threshold showing’ by a party, that each requirement of Rule 23 is met.”

• Preponderance of evidence


• “The court must resolve all factual or legal disputes relevant to class certification, even if they overlap with the merits-including disputes touching on elements of the cause of action.”


•“The court's obligation to consider all relevant evidence and arguments extends to expert testimony, whether offered by a party seeking class certification or by a party opposing it.”

Class Certification Is A Two-Way Street

• Rule 23 standards not relaxed in consumer fraud cases

•Class certification “may force a defendant to settle rather than incur the costs of defending a class action and run the risk of potentially ruinous liability.”

How Can Case Be Tried?

• Trial court “must formulate some prediction as to how specific issues will play out in order to determine whether common or individual issues predominate in a given case.”

•“If proof of the essential elements of the cause of action requires individual treatment, then class certification is unsuitable.”

Proof Of Injury

• Plaintiffs must demonstrate that injury is capable of common proof

• Court must make “rigorous assessment of the available evidence and the method or methods by which plaintiffs propose to use the evidence to prove impact at trial.”

Looking Behind The Pleadings

• Court may “delve beyond the pleadings”

• Court may make “preliminary inquiry into the merits”

• Disputes relating to merits are “not forfeited” in favor of plaintiffs

• Counsel’s assurances are not enough

Findings

• Findings as to each element capable of being proved by common proof

• Clear and precise statement of class parameters

• Clear and complete list of the claims, issues or defenses to be treated on a class basis

Experts

• Daubert applies

• “Weighing conflicting expert testimony at the certification stage is not only permissible; it may be integral to the rigorous analysis Rule 23 demands.”

Whose Class Cert Law Do You Want – Other Than The Third Circuit?

• Most Circuits weigh conflicting evidence – 2nd Circuit – IPO– 5th Circuit --- Castano– 7th Circuit -- Szabo

• 9th Cir: Evidence need only be “sufficient” to demonstrate requirements for class certification Dukes v. Wal-Mart, Inc., 474 F.3d 1214 (9th Cir. 2007)– Not resolve battle of experts

• 1st Cir: Applies “some evidence” standard

Do Rules Of Evidence Apply?

• One Circuit has expressly held Rules do not apply:– Paxton v. Union Nat’l Bank, 688 F.2d 522, 562 n.14 (8th Cir. 1982)

• One Circuit has expressly applied Federal Rules of Evidence:– Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 938 (7th

Cir. 1989)

• Some trial courts have implied Rules of Evidence apply by rejecting hearsay.

Pecere v. Empire Blue Cross and Blue Shield, 194 F.R.D. 66, 70 (E.D.N.Y. 2000)

Convincing Court To Apply Rules

• R. Evid. 101:

– Govern “proceedings” in courts

– Unless exempted under R. Evid. 1101• Class certification not among exemptions

Do Daubert/Frye Apply?

o Gutierrez v. Johnson & Johnson, No. 01-5302, 2006 WL 3246605 at *2 (D.N.J. Nov. 6, 2006):

o “[A]ny Daubert inquiry is a limited one, tailored to the purpose for which the evidence is offered -- to determine whether the requisites of Rule 23 have been met.”

Convincing Court To Apply Daubert/Frye

– Must apply where Rules of Evidence apply

– Courts must look down the road to see how claims would be tried

– Not an evaluation of the merits

Daubert

Importance Of Daubert

– On Science –• Educational value

– On Injury-in-fact/Damages• May be outcome determinative• May couple with summary judgment

– Convince court that it’s not an accepted theory– Therefore, no proof of injury/damages on classwide

basis

Issue Certification

– R. 23(C)4)• When appropriate, an action may be maintained as

a class action with respect to particular issues. – Manual on Complex Litigation:

• Selectively used, this provision may enable a court to achieve the economies of class action treatment for a portion of a case, the rest of which may either not qualify under Rule 23 (a) or may be unmanageable as a class action.

Issue Certification

– Approved issue certification• 2d, 3rd, 7th, and 9th Circuits

– Must significantly advance litigation

– Can’t be used if many issues left unresolved• 2nd Cir. (McLaughlin)• 8th Cir. (St. Jude)

– May violate 7th Amendment right to jury trial• 7th Cir. (Rhone Poulenc): Judge must not divide issues

between separate trials in such a way that the same issue is reexamined by different juries.

Issue Certification

– Disapproved issue certification

• 5th Circuit (Castano)• Can’t manufacture

predominance• Whole cause of action

must meet predominance requirement

• Housekeeping rule

Fluid Recovery

– Used by plaintiffs in attempt to avoid individual inquiry of causation

• Jury determines aggregate damage to class

• Individual allocation of award made later administratively and formulaically

• Remainder distributed cy pres

E.g., Price v. Altria

Fluid Recovery

– McLaughlin v. American Tobacco Co, 522 F.3d 215, 231 (2d Cir. 2008)

– Rules Enabling Act violation:

• Roughly estimated astronomical damages from aggregate determinate

– does not reflect actual number of injured plaintiffs– little relationship to economic harm caused

• Distributing residue on the basis of cy pres principles means that defendants will pay an inflated total, still an overpayment

– Due Process violation:• Impermissibly masks the prevalence of individual issues

• Right of defendants to challenge individual plaintiffs is lost

Fluid Recovery

– Against fluid recovery: 3rd Circuit (Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc.)

– 9th Cir. (In re Hotel Tel. Charges)

– 4th Cir.: Rejected fluid recovery

– 8th Cir.: Permits it under appropriate circumstances – but does not automatically utilize it as a procedural alternative to class action disposition

– 7th Cir. – Simer – middle road: The general inquiry is whether the use of such a mechanism is consistent with the policy or policies reflected by the statute violated. This matter can be more particularized into an assessment of to what extent the statute embodies policies of deterrence, disgorgement, and compensation.

Which Circuit Law Do You Want?

– Best: 5th Circuit • on class certification approach• on issue certification• no fluid recovery law

– Next best: 2nd, 3rd, 4th, 7th

• But 7th is mixed on fluid recovery

– 8th

– Fourth tier: 1st

– Undeveloped law: 6th, 10th, DC

– Worst: 9th Cir. • on class certification approach• on issue certification• good on fluid recovery

Choice Of State Law Can Make Or Break Class Certification


– Burden is on plaintiff• Analysis must be on claim-by-claim

basis

– To get nationwide class, plaintiffs must show that • No difference between law of single state

on claim and law of all other states• Single state’s interest outweighs interest of

all others in enforcing its laws


– Court must identify substantive law issues that control the outcome of litigation

– Constitutionally required to protect rights of absent class members and defendants

• Procedural Due Process/Enabling Act• Dormant Commerce Clause – applying law to

transactions that occurred wholly outside of state

– Presumption against extraterritorial application


– Application of multiple state laws causes manageability and predominance problems

• Class certification impossible where 50 states establish large number of different legal standards governing a particular claim

• Impossible task of instructing jury on relevant law

– Important to consider not only wording of statutes, but legislative history and judicial construction

Differences: Consumer Fraud Law

– Who qualifies as a consumer under the law– Whether intent/scienter is an element– How to define ascertainable injury or injury-in-fact– Availability of learned intermediary defense– Availability of other specialized defenses– Statutes of limitation– Availability of treble or punitive damages– Availability of jury trial– Permissibility of class action – Whether reliance is an element– Definition of causation (transaction causation or loss

causation)

Differences: Unjust Enrichment Law

Central concept:• Plaintiff conferred benefit on defendant under circumstances

that make it unjust or inequitable for defendant to retain that benefit.

Differences: • Basic elements

– Enrichment, impoverishment, connection, absence of justification, no remedy at law

– Benefit, defendant’s appreciation of benefit, defendant’s acceptance of benefit under inequitable circumstances

Differences: Unjust Enrichment Law

• Type of Misconduct–Illegal or unlawful–Doesn’t have to be illegal or

unlawful–Can be where defendant innocently

received benefit and passively accepted it

–Unjust, unconscionable, or unlawful• Whether plaintiff must prove

absence of adequate remedy of law

Differences: Contract Law

– Contract claims– Decisions refusing to certify

• Differences on issues such as parol evidence, extrinsic evidence, laches, waiver and unconscionability

– Breach of warranty claims– Variations in warranty law

• Requirements that putative class members be in privity with manufacturer and they provide notice of the alleged breach of warranty to the manufacturer

• Sanders v. J & J (DNJ)

The “Negative Value” Fallacy

• That these are “negative value” cases is plaintiffs’ most potent policy argument in favor of class certification


[W]e identified as important to the superiority analysis a consideration of the “class members' ‘lack of financial wherewithal.’ ” . . . In such circumstances, we have expressed a concern that, absent a class, the individual class members would not pursue their claims at all, thus demonstrating superiority of the class action mechanism.

Int’l Engineers v. Merck


• These are not true “negative value” suits

• These are fabricated claims

• If people were truly injured, ample avenues of redress

• Attorney fee awards, not compensation for real injury, driving many of these lawsuits

The “Reliance Is Irrelevant” Fallacy

• Evolution of CFAs– State AG actions

• No need to show any individual relied

– Private cause of action• Need to show ascertainable loss caused by fraud


– Engineers: Ascertainable loss causation is an individual issue

“Our statute essentially replaces reliance, an element of proof traditional to any fraud claim, with the requirement that plaintiff prove ascertainable loss.”

This means:– Must prove causative link between injury and fraud– Can’t prove injury by “fraud on the market” theory

The “Reliance Is Irrelevant” Fallacy: RICO

Bridge v. Phoenix Bond & Indemnity Co., --- U.S. ----, 128 S.Ct. 2131, --- L.Ed.2d ---- (2008)—

– Reliance is not an element to be plead in a mail fraud case– Person can be injured by reason of mail fraud even without

reliance

but . . .

The “Reliance Is Irrelevant” Fallacy: RICO

– “none of this is to say that a RICO plaintiff who alleges injury 'by reason of' a pattern of mail fraud can prevail without showing that someone relied on the defendant's misrepresentations....”

– “In most cases, the plaintiff will not be able to establish even but-for causation if no one relied on the misrepresentation....”

– “In addition, the complete absence of reliance may prevent the plaintiff from establishing proximate cause.”

RICO Reliance/Causation

– Has to be either first party or third party reliance

– If defendant can show that no one relied, no proximate causation


• Defendants have the right to test proof:

“Whatever Group Health means about the need for these plaintiffs to present direct evidence of individual reliance, it does not eliminate the right of a defendant to present evidence negating a plaintiff's direct or circumstantial showing of causation and reliance.”

St. Jude, 8th Cir.


• Could individual sue for consumer fraud, where he/she says:– Didn’t see the misrepresentation– Didn’t rely on the misrepresentation– Hasn’t been injured by the misrepresentation– But someone else has– But wants his/her money back

If Individual Can’t Bring Claim, No Class Action

• Cannot use procedural tool of Rule 23 to effect a change in the substantive law – Violates Federal Rules Enabling Act– Violates Substantive Due Process

• Bundling together non-actionable claims into a class action does not make them actionable

If Individual Can’t Bring Claim, No Class Action

• Benefit of bringing summary judgment

Individual Issues Of Causation

• Differences in information– personal experience– other consumers– family/friends– competitors– media– teachers– government– trusted professionals

• Differences in actual knowledge or beliefs

• Differences in reasons for purchases

Different Reactions After “Truth” Known

• Changes in consumer demand?

• Changes in price?

• Named plaintiffs’ behavior?

Challenging The Damages Theory

• Hydrogen Peroxide: Plaintiff must present valid, reliable, and scientifically accepted methodology for demonstrating impact (i.e. damages) to everyone in the class

– key class certification battleground• no classwide impact = class certification inappropriate• classwide impact but class members impacted to different degrees

= courts more receptive to certifying class and leaving damages issues for another day

– McLaughlin rejected plaintiffs’ proposed damage shortcuts:• Loss of value• Artificial market

DELVACCA Inaugural In-House Counsel Conference April 1, 2009 Ezra D. Rosenberg Will Sachse Dechert LLP The New Class Action Game: “No Injury” Plaintiffs.

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