All posts by Adam Doerr

The Case of the $5 Footlong*

View Adam Doerr's Complete Bio at robinsonbradshaw.comFor what appears to have been a frivolous lawsuit, In re: Subway Footlong Sandwich Marketing and Sales Practices Litigation generated an interesting opinion from the Seventh Circuit full of class-action issues. The case originated when an Australian teenager posted a photo of an 11-inch Subway sandwich, with a tape measure, on his Facebook page. Coming in the midst of Subway’s $5 FootlongsTM campaign, the picture went viral, and class-action cases were soon pending.

After early discovery showed that most “footlongs” were, in fact, 12 inches long, plaintiffs’ counsel ran into a series of problems with their damages class under Rule 23(b)(3), including:

    • commonality (“The overwhelming majority of Subway’s sandwiches lived up to their advertised length, so individual hearings would be needed to identify which purchasers actually received undersized sandwiches. But sandwich measuring by Subway customers had been a fleeting social-media meme; most people consumed their sandwiches without first measuring them”);
    • materiality under state consumer protection laws (“Individualized hearings would be necessary to identify which customers, if any, deemed the minor variation in bread length material to the decision to purchase”); and
    • damages (“[A]ll of Subway’s raw dough sticks weigh exactly the same, so the rare sandwich roll that fails to bake to a full 12 inches actually contains no less bread…. As for other sandwich ingredients, class members could be as profligate or as temperate as they pleased: Subway’s ‘sandwich artists’ add toppings at the customer’s request.”)

The plaintiffs shifted strategy, moving from a damages class to a Rule 23(b)(2) class for injunctive relief. Following mediation, the case settled for a series of “procedures designed to achieve better bread-length uniformity,” including bread oven inspections and use of a “tool” (perhaps a ruler?) to measure compliance. To deal with deficient rolls that slipped past the watchful eyes of the inspectors, a poster would be prominently displayed at each restaurant: “Due to natural variations in the bread baking process, the size and shape of bread may vary.”

The settlement provided for $520,000 in fees for plaintiffs’ attorneys, enough for nearly 20 miles of sandwiches, and incentive payments of $500 each for the class representatives. But one class member—Theodore Frank—objected. He argued that the settlement was worthless to the class of Subway customers, who still faced a non-neglible (and relatively meaningless) risk of a short sandwich despite the large payment to class counsel. The attorneys for the class responded that if Subway continued to sell sandwiches less than 12 inches long, failure to comply with the settlement could be punished by contempt. The Seventh Circuit was not persuaded: “Contempt as a remedy to enforce a worthless settlement is itself worthless. Zero plus zero equals zero.”

That the Seventh Circuit even heard an appeal from a settlement approved by the district court also reveals an interesting dynamic in class-action settlements. Class members generally have the right to object to a proposed class-action settlement, and they can attempt to appeal a settlement approved over their objections. Class member objections often involve the fees to be paid to the plaintiffs’ attorneys, especially when the settlement appears to benefit attorneys more than the members of the class. Mr. Frank, the objector in the Subway case, is an attorney who has objected to dozens of class-action settlements as the director of the Center for Class Action Fairness, a nonprofit that describes itself as challenging unfair class-action procedures.1 Interestingly, although Mr. Frank is generally a nonprofit objector, in 2015 he was involved in a situation he described as “lurid” and “Grishamesque” when his $250,000 consulting agreement with a professional serial objector (an attorney who objects to class-action settlements in hopes of being paid to drop the objection by the lead attorneys) became public, as reported by Alison Frankel at Reuters.

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1 The Center for Class Action Fairness is part of the Competitive Enterprise Institute, a conservative organization that advocates for issues including tort reform. Critics of these tort reform efforts contend that by selectively focusing on unrepresentative cases, like litigation over the length of a Subway sandwich, tort reformers are attempting to paint a distorted picture of the legal system that ignores the important role that class actions play in protecting consumers and enforcing civil rights.

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NC Class Certification Appeals Bill Becomes Law

View Adam Doerr's Complete Bio at robinsonbradshaw.comHouse Bill 239, which reduces the number of judges on the North Carolina Court of Appeals and provides for direct appeals of decisions regarding class action certification to the North Carolina Supreme Court, is now law. On April 26, the General Assembly voted to override Governor Cooper’s veto, and the bill has been enacted as Session Law 2017-7.

Our earlier analysis of the law did not address when the provision regarding appeals of class certification decisions would become effective. Similar legislative changes have generally informed practitioners and courts that they apply to “appeals filed on or after” a specific date. The provision in this same bill regarding direct appeals of orders terminating parental rights does this, stating that it shall “become effective January 1, 2019, and apply to appeals filed on or after that date.” Rules and jurisdictional changes can also apply to cases filed after a certain date, or, as with appeals to the Supreme Court under the Business Court Modernization Act, based on the date of designation to the Business Court.

But House Bill 239 has no such language for appeals of decisions regarding class certification. Section 5 of the law simply gives the 2019 effective date for appeals in parental rights cases and states that the “remainder of this act is effective when it becomes law.”

This leaves unclear how the law will apply to any pending appeals of class certification decisions. The operative language states that “[a]ppeals of right lie directly to the Supreme Court … [from] [a]ny trial court’s decision regarding class action certification under G.S. 1A-1, Rule 23.” The most straightforward interpretation would be that, after April 26, a class certification appeal must be filed with the Supreme Court, but cases currently pending in the Court of Appeals would stay there. A party could file a bypass petition under Appellate Rule 15, asking the Supreme Court to take the case directly, but otherwise the Court of Appeals would keep the case. Given the ambiguity in the statute, however, it’s also possible the appellate courts could read the revised Section 7A-27 as requiring transfer of pending class action appeals to the North Carolina Supreme Court, or even as raising issues regarding the jurisdiction of the Court of Appeals in a pending case.

The answers to these issues, if they are presented, may be some time in coming. It could take much longer for the Supreme Court to address to some of the questions we pointed out in our earlier post, such as what qualifies as a “decision regarding class action certification” under the new law. We will keep you posted.

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Pending Bill Would Permit Interlocutory Appeals of Class Certification Decisions Directly to NC Supreme Court

View Adam Doerr's Complete Bio at robinsonbradshaw.comGovernor Cooper vetoed House Bill 239 on April 21, rejecting the General Assembly’s effort to reduce the number of judges on the North Carolina Court of Appeals from 15 to 12. The bill has been quite controversial, and four former North Carolina Supreme Court justices have said it would “seriously harm our judicial system.”  Although the bill does not speak in partisan terms, its practical effect would be to prevent Governor Cooper from appointing three (or perhaps two) new judges to the Court of Appeals to replace Republican judges who will reach the mandatory retirement age during his term.1

Mostly overlooked in the public and legislative debate is a major change to appeals in class actions. The bill contains a provision that allows for an appeal of right from “Any trial court’s decision regarding class action certification under G.S. 1A-1, Rule 23.”

As we explained in our analysis of the Supreme Court’s decision in Fisher, North Carolina currently takes an unusual approach to appeals in class actions. An order denying class certification is immediately appealable because the courts have held that it affects a substantial right under N.C. Gen. Stat. 7A-27. An order granting class certification, by contrast, is generally not immediately appealable. Although the appellate courts have sometimes permitted such appeals, including in Fisher, the courts have avoided stating that orders granting class certification affect a substantial right. In Fisher, for example, the Court held that “that the subject matter of this case implicates the public interest to such a degree that invocation of our supervisory authority is appropriate.”

Our firm’s amicus brief for the NC Chamber in Fisher advocated for a ruling that an order granting class certification could affect a substantial right, permitting interlocutory review. The rationale for this approach is that an order granting class certification is often dispositive because defendants face enormous pressure to settle. Indeed, we have not identified a single post-judgment appeal of an order granting class certification against a private party since North Carolina’s enactment of Rule 23 in 1967.

The substantial rights approach, if adopted, would have been similar to the rule in federal courts, where Rule 23(f) provides that a “court of appeals may permit an appeal from an order granting or denying class-action certification.” To obtain review, the party seeking to appeal must file a petition requesting permission to appeal. Such appeals are infrequently granted; published studies estimate that appellate courts grant less than one in four Rule 23(f) petitions.2

This legislation would go further than the federal approach, and further than the law in other states with which we are familiar, in three important ways. First, appeals under this statute would not be discretionary, in contrast to federal Rule 23. All orders would be appealable, regardless of whether the appellate court thought that interlocutory review was appropriate.

Second, appeals would go directly to the North Carolina Supreme Court, bypassing the Court of Appeals. There are currently only two kinds of appeals that go directly to the Supreme Court: a death penalty conviction and decisions from the North Carolina Business Court. N.C. Gen. Stat. 7A-27(a).  And interlocutory appeals from the Business Court are limited to orders that affect a substantial right, effectively determine or discontinue the action, or grant or refuse a new trial.

Third, House Bill 239 would permit an appeal of “[a]ny trial court’s decision regarding class action certification.” Note the contrast with federal Rule 23(f), which permits appeal from an “order granting or denying class-action certification.” A “decision regarding” class action certification could be significantly broader. For example, is an order denying a motion for decertification a “decision regarding class action certification” that would allow an interlocutory appeal? How about a motion to strike class allegations? Even in federal court, with Rule 23(f)’s more limited language and the appellate court’s discretion as a check, there is litigation over the scope of the right to appeal.3 Here, given the breadth of the language and the Supreme Court’s lack of discretion to reject an appeal, there is significant potential for extensive litigation over the scope of the right to appeal, repetitive appeals, and gamesmanship.

House Bill 239 now goes back to the General Assembly. If it overrides Governor Cooper’s veto, as it did with a recent bill applying party labels to elections of District and Superior Court judges, major changes are coming to class action litigation in North Carolina state courts.

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1 One of the Republican judges, Judge McCollough, announced his retirement on April 24, just over a month early. If he had waited until reaching his mandatory retirement on May 28, the legislature might have overridden the Governor’s veto and the law would have prevented appointment of a successor. As Judge McCullough told the Raleigh News & Observer, he did not want his legacy to be an “impairment to the appeals court” by reducing its size. Governor Cooper has appointed Charlotte attorney John Arrowwood to fill the seat.

2 We have found that existing research misses a significant number of 23(f) petitions in the Fourth Circuit. These petitions are difficult to research, as the orders are generally not published and require significant effort in PACER to uncover. We plan to share the results of our own research on this issue in a future post.

3 Compare In re Complaint of Ingram Barge Co., 517 F.3d 246, 247 (5th Cir. 2008) (refusing to hear a 23(f) petition from an order granting a motion to strike class action allegations because it was not an order “granting or denying” certification) with In re Bemis Co., Inc., 279 F.3d 419, 421 (7th Cir. 2002) (accepting review of an order granting a motion to strike class allegations because it was the “functional equivalent of denying a motion to certify a case as a class action, a denial that Rule 23(f) makes appealable (at our discretion).”).

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Congress Considering Major Class Action Reform Legislation

View Adam Doerr's Complete Bio at robinsonbradshaw.comRep. Bob Goodlatte (R-Va.), the Chairman of the House Judiciary Committee, recently introduced a bill that would make significant changes to federal class action litigation. The Fairness in Class Action Litigation Act of 2017 (H.R. 985) states that it is intended to allow prompt recoveries to plaintiffs with legitimate claims and “diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system.”

In its current form, the draft bill would likely eclipse the 2005 passage of the Class Action Fairness Act as the most significant legislation on class actions in decades. Rep. Goodlatte has introduced similar legislation in previous years, but passage is considerably enhanced with unified Republican control of the House, Senate, and Presidency. Among other changes, the bill would enact the following:

  • Prevent certification of a class seeking monetary relief unless the plaintiff “affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.” (§ 1716) In other words, classes could not include individuals who have not suffered damage, or where damage is not yet clear.
  • Require class counsel to describe how the named plaintiff agreed to be included in the complaint, identify any other class action where the named plaintiff had a similar role, and disclose any family or employment relationship between class counsel and the named plaintiff (in which case certification must be denied). (§ 1717)
  • Require the party seeking certification to show a “reliable and administratively feasible mechanism” for (a) determining whether class members fall within the class definition and (b) distributing monetary relief to “a substantial majority of class members.” (§ 1718(a)). This provision appears to be an effort to impose a formal ascertainability requirement on class certification, as the Fourth Circuit has done in some cases.
  • Make significant changes to attorneys’ fees, including (1) preventing any payment or even determination of fees to class counsel until the distribution of monetary recovery to class members is complete, (2) limiting fee awards to “a reasonable percentage of any payments directly distributed to and received by class members,” and (3) limiting the payment of attorney’s fees based on equitable relief to “a reasonable percentage of the value of the equitable relief.” (§ 1718(b)).
  • Require courts to report, and the Federal Judicial Center to track, disbursements to class members. The Federal Judicial Center would prepare an annual report summarizing how funds paid by defendants in class actions have been distributed, including the largest and smallest amounts paid to any class member and payments to class counsel. (§ 1719) Alison Frankel of Reuters, who writes often and well on class actions, referred to this as “most intriguing idea in House Republicans’ bill to gut class actions.”
  • Bar certification of issue classes (§ 1720), an issue we have previously covered in both a district court case regarding the relationship between predominance and issue certification and when the Supreme Court declined to resolve a circuit split over issue certification.
  • Stay discovery while preliminary motions are pending. (§ 1721) (Interestingly, this provision formally recognizes a “motion to strike class allegations,” a motion that is not currently listed by name under Rule 23, although such motions may be permitted under Rule 23(d)(1)(D), which allows the Court to enter an order to “require that the pleadings be amended to eliminate allegations about representation of absent persons.”)
  • Provide for appellate review of orders granting or denying class certification as a matter of right. (§ 1722) This would be a significant departure from current practice under Rule 23(f), which gives Courts of Appeal substantial discretion in deciding whether to permit such interlocutory appeals.

The bill would also allow more personal injury cases to stay in federal court by changing the diversity jurisdiction analysis in multiple plaintiff cases, and it would make significant changes to multidistrict litigation practice, including barring the transferee judge from conducting a trial unless all parties consent.

The draft legislation is already generating controversy, and this will significantly increase as it advances. In particular, basing attorney’s fee awards on a percentage of the “value of the equitable relief” will be hotly debated. Equitable relief is, by nature, difficult or impossible to value in financial terms. The Washington Lawyers’ Committee for Civil Rights has already registered its opposition, noting the difficulty of putting a value on a class relief protecting disabled individuals from abusive conditions or providing them access to treatment, transportation, and community services.

The bill was introduced on February 9. On February 15, following a series of failed attempts by Democrats to introduce amendments, the Judiciary Committee voted on party lines (19-12) to forward to the bill to the full House. We’ll continue to track this legislation and bring you significant updates.

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NC Supreme Court Affirms Certification of 800,000 Member Class (Fisher Part 2)

View Adam Doerr's Complete Bio at robinsonbradshaw.com
As we explained in Part 1 of our analysis of Fisher v. Flue-Cured Tobacco Cooperative Stabilization Corporation, the North Carolina Supreme Court recently exercised jurisdiction over an interlocutory appeal and affirmed the certification of a class of hundreds of thousands of current and former tobacco farmers. In the first part, we discussed the Court’s jurisdictional analysis and North Carolina’s unique approach to interlocutory appeals of class certification orders. In this post, we discuss the Court’s substantive analysis of the class certification issues.

The Cooperative’s first challenge to class certification involved the argument that plaintiffs’ claims were derivative. The Cooperative argued that, like a North Carolina corporation, it was entitled to receive a written demand from members to take suitable action before filing suit. The Court declined to decide this question, holding that the derivative demand requirement in section 55-7-42 of the General Statues did not address class certification. The Court also noted that Rule 23 and the Court’s precedent did not require the trial court to consider whether class claims are derivative. The Court explicitly stated that it “express[ed] no opinion” on the derivative issues and noted that the Cooperative could make this argument via a motion to dismiss. Under the Court’s analysis, derivative and class certification issues are distinct, at least under the somewhat unique circumstances of this case.

The Court then turned to the core Rule 23 issues of commonality and manageability. Citing Crow v. Citicorp Acceptance Co., 319 N.C. 274 (1987), which apparently retains its status as one of the leading North Carolina decisions on Rule 23, the Court noted the requirement that there be no conflict of interest between the class representative and the unnamed class members. The Cooperative had argued that one of the named Plaintiffs was a member of the Cooperative’s board of directors, a conflict of interest that should have precluded class certification. The Court disagreed, noting that the plaintiffs had not alleged that individual members of the board had engaged in misconduct, and that none of the directors was named as an individual defendant. Accordingly, the Court held, the trial court did not abuse its discretion in certifying the class.

Interestingly, the Court implies that it would have affirmed the trial court had it reached the opposite conclusion:

Although a trial court might review a class representative’s other activities and find that these activities create a conflict of interest with class members, here the trial court exercised its discretion and determined that Renegar is capable of representing the interests of class members.

The fact that a hypothetical trial court might have found that this conflict of interest prevented certification serves as an important reminder of the demanding standard of review for class certification decisions. This statement also illustrates how opinions like Fisher have important limitations as precedent at the trial level. Litigants in future cases won’t be able to cite Fisher as stating a general rule that directors can serve as class representatives in a case challenging decisions in which they participated. Rather, future plaintiffs will only be able to say that, under the circumstances of this case, it was not an abuse of discretion to certify a class despite the fact that a director was named as a class representative. Of course, their opponents would be equally justified in noting, based on the language quoted above, that a denial of certification on this basis would probably have been affirmed in similar fashion.

Next, the Court turned to the Cooperative’s claims that other conflicts of interest among members of the class precluded certification. These alleged conflicts included that (1) some class members still participated in the cooperative and others did not, (2) some class members were involved in a federal case where they claimed their interests were not being represented in the Fisher action, and (3) certain class members who sold tobacco during years where the Cooperative had positive revenues had claims that other class members lacked. The Court did not engage these questions in any detail, and it did not address the federal lawsuit at all. Instead, it emphasized that the “trial court may be in the best position to determine whether any conflicts among class members warrant denial of class certification,” and that the trial court had “considered defendant’s arguments and rejected them.” Again, the abuse of discretion standard played a central role in the Court’s analysis.

The Court then turned questions of commonality and manageability. Citing its 2014 decision in Beroth Oil Co. v. NC DOT, 367 N.C. 333 (2014), the Court noted that Beroth involved a “discrete fact-specific inquiry” for members of the class, as we discussed in our analysis of the case. Here, the Court noted, the “trial court identified many issues of law and fact that are common to the class.” And, as with its discussion of conflicts of interest, the Court implied that it may well have affirmed the opposite conclusion, noting that “the trial court exercised its broad discretion to allow, rather than deny, class certification.”

Finally, the Court affirmed the trial court’s manageability finding, noting the “extremely large number of similarly situated class members and the impracticality of requiring them to protect their rights through filing hundreds of thousands of individual lawsuits.” The Court did not address whether the individual class members would actually have pursued such claims, given the fact that many of them may not have farmed tobacco for decades or had a claim to any reserves, nor did it address the Cooperative’s argument that the size of the class and lengthy class period would make the class action unmanageable. Once again, it deferred to the trial court, noting that it could not conclude that the trial court abused its discretion by ruling that a class action was superior to individual litigation.

Although Fisher generally follows existing precedent in Crow and Beroth, it provides an important demonstration of this Supreme Court’s willingness to defer to trial courts on class certification. We’ll be watching to see if that holds in future cases as the Court changes, and we’ll also monitor whether North Carolina appellate courts will begin to take a more permissive approach towards interlocutory review of orders granting class certification more generally. As for Fisher itself, the case has been remanded to the trial court for further proceedings, although it’s unclear where that will be, given that Judge Jolly was handling the case as a Rule 2.1 judge and has since retired. We’ll continue to follow this case, which offers the potential to raise many interesting issues as it proceeds, especially in the areas of class notice and administration.

(John Wester of our firm served as amicus counsel to the NC Chamber in Fisher.)

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