All posts by Mark Hiller

About Mark Hiller

Mark Hiller clerked for Justice Sotomayor in the 2011-12 term.

Can a Class Action Proceed when the Named Plaintiff’s Claim Becomes Moot? A Recent View from the North Carolina Business Court

View Mark Hiller’s Complete Bio at robinsonbradshaw.comIn this post we talk about two of our favorite things (relatively speaking): class actions and mootness.  We last looked at these issues when covering the U.S. Supreme Court’s decision in Campbell-Ewald Company v. Gomez, 136 S. Ct. 663 (2016).  There, the Court rejected the defendant’s attempt to “pick off” the named plaintiff in a class action case.  The defendant had made a Rule 68 offer to settle the case for the full value of the plaintiff’s claim.  The plaintiff declined, but the defendant argued that its offer nonetheless mooted the claim.  The Supreme Court rejected that argument, holding that an unaccepted Rule 68 offer does not moot a claim—at least if the defendant does not deposit the Rule 68 money with the court.

But what if the named plaintiff’s claim does become moot?  Can the case stay alive based on the claims of the class?  The Supreme Court has been wrestling with that question for decades, and the answer turns in large part on timing—when did the named plaintiff’s claim become moot?  If it became moot after the class was certified, then the class action is not rendered moot because, at that point, the class has acquired a legal status independent of the plaintiff’s.  See Sosna v. Iowa, 419 U.S. 393 (1975).  The same rule applies if the named plaintiff’s claim became moot after the trial court denied class certification.  If the denial is later reversed, the reversal will relate back to the time of the trial court’s erroneous certification decision.  See U.S. Parole Comm’n v. Geraghty, 445 U.S. 388 (1980).  In both of these situations, the named plaintiff had a live claim at the time the trial court ruled on certification.

That leaves open a third scenario: a named plaintiff whose claim becomes moot before the trial court makes any certification ruling.  What then?  Chief Judge Gale of the North Carolina Business Court faced this question in the recent case of Chambers v. Moses H. Cone Memorial Hospital.  To simplify the facts and procedural history, the plaintiff received emergency treatment at a hospital and then objected to the amount of the bill he received.  The plaintiff claimed that the hospital charged uninsured patients, like himself, more for emergency services than the hospital charged its insured patients.  He brought a class action complaint on behalf of himself and other uninsured patients who received emergency services at the hospital.  His initial complaint alleged common law claims and sought damages.  But he later amended the complaint to seek only a declaratory judgment that the hospital may collect only “reasonable payments” for its emergency services, rather than the “regular rates” the hospital charged in its form contract.

Judge Gale first held that the plaintiff’s declaratory judgment claim was moot because the hospital was not seeking to recover the unpaid amount of the plaintiff’s bill.  (The hospital had been seeking to do so earlier in the case, but the hospital dismissed its counterclaims with prejudice after the plaintiff dropped his damages claims.)

That left the more difficult question: Even though the plaintiff no longer had a live claim, could the case continue based on the claim of the putative class?  Judge Gale began by noting that the case did not come within the holdings of Sosna or Geraghty because the court had not ruled on certification at the time the plaintiff’s claim became moot.  (It appears the plaintiff had not yet filed a certification motion.)

Judge Gale then addressed whether the putative class claim could proceed based on an exception to the mootness doctrine for claims that are “so inherently transitory that the trial court will not have even enough time to rule on a motion for class certification before the proposed representative’s individual interest expires.”  Judge Gale explained that the classic example of an “inherently transitory” claim was one that inevitably becomes moot with the passage of time, such as a challenge to pretrial detention.  In those cases, dismissing a case as moot would mean that no plaintiff could challenge the defendant’s conduct, because any plaintiff’s individual claim would become moot before the case could be fully litigated.  Judge Gale said that the plaintiff’s claim—challenging the hospital’s emergency-services rates for uninsured patients—doesn’t fit into that passage-of-time category for “inherently transitory” claims.

But that left another possibility—one that circles us back to Campbell-Ewald: Can a claim be “inherently transitory” when the claim becomes moot, not because it is time-sensitive, but because the defendant has “picked off” the claim by offering to pay its full amount before the trial court makes a decision on certification?  Judge Gale noted that the Ninth Circuit has applied the “inherently transitory” exception in this scenario (as have several other federal circuit courts).  But ultimately, Judge Gale did not have to decide whether to follow this interpretation of the “inherently transitory” exception, because he concluded that there was no evidence showing that the hospital tried to pick off the plaintiff’s claim.  To the contrary, Judge Gale stated, the plaintiff’s claim became moot only when the plaintiff decided to dismiss his claims seeking damages.  Judge Gale agreed with the hospital that, had the plaintiff maintained those claims, then the hospital’s dismissal of its counterclaims “would not have mooted [plaintiff’s] declaratory claim.”

Conclusions

So, what to take away from all this?

First, class action law is complicated, especially when mootness is thrown into the mix.

Second, the law is pretty clear that a class action is not rendered moot when the named plaintiff has a live claim at the time the trial court decides whether to certify the class.

Third, the law is less clear whether the class action is rendered moot when the named plaintiff’s claim becomes moot before the trial court makes a certification decision.  In that scenario, the issues will likely focus on whether the case fits into exceptions to the mootness doctrine, such as the “inherently transitory” exception discussed above.

Fourth, there will likely be continued developments in the law as to whether a defendant’s effort to pick off a named plaintiff succeeds in mooting the plaintiff’s claim, and if so, whether that effort satisfies the “inherently transitory” exception such that a live case or controversy still exists.

We’ll keep you updated as the law develops.

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U.S. Supreme Court Decides Class Action “Pick Off” Case In Favor Of Plaintiff, But Leaves Open The Possibility Of A Different Result In Future Cases

View Mark Hiller’s Complete Bio at robinsonbradshaw.comLast November we previewed a case raising an important question in the class action world: If a defendant in a putative class action offers the named plaintiff complete relief on the plaintiff’s individual claim, but the plaintiff does not accept the offer, does the offer nonetheless render the case moot? On January 20, the Supreme Court answered “no,” but left open the possibility of a different result if the defendant actually deposits the amount of the plaintiff’s claim in an account payable to the plaintiff. The case is Campbell-Ewald Co. v. Gomez, and you can read the opinion here.

The case began when the plaintiff received a text message from a recruiter for the U.S. Navy. Claiming that he did not consent to receive the message, the plaintiff filed a putative class action under the Telephone Consumer Protection Act. The maximum damages the plaintiff could recover under the statute were $500 for each violation, which could be trebled if the defendant willfully or knowingly violated the statute. Before the deadline for filing class certification briefing, the defendant made the plaintiff a settlement offer of $1,503 per message—just over the maximum treble damages the plaintiff could potentially recover—plus costs and an injunction against committing further violations of the statute. The defendant also filed an offer of judgment on those terms pursuant to Federal Rule of Civil Procedure 68. The plaintiff did not accept the settlement offer and allowed the Rule 68 offer to lapse under the time deadline established in that rule.

The defendant then moved to dismiss the case. The defendant argued that because it had offered the plaintiff all the relief the plaintiff could recover under the statute, the offer rendered the plaintiff’s individual and putative class claims moot, even though the offer was not accepted. The district court and Ninth Circuit both rejected that argument.

In a decision written by Justice Ginsburg, the Supreme Court agreed with the lower courts, holding that the defendant’s unaccepted offer did not moot the plaintiff’s individual or putative class claims. The Supreme Court relied on “basic principles of contract law,” reasoning that the defendant’s offers, “once rejected, had no continuing efficacy.” “Like other unaccepted contract offers, it creates no lasting right or obligation.” Accordingly, “[w]ith the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.”

Significantly, however, the Supreme Court left open the possibility that it might reach a different outcome if the defendant had tendered payment to the plaintiff and judgment were entered against the defendant: “We need not, and do not, now decide whether the result would be different if 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. That question is appropriately reserved for a case in which it is not hypothetical.”

That’s an important reservation. As this case illustrates, class actions often are brought under statutes that provide for modest individual damages (here, a maximum of $1,500 per violation) that are relatively easy to calculate. If a defendant can render a putative class action moot simply by depositing that sum in an escrow account or with the court, and admitting to liability, then defendants might well pursue that strategy, leaving Campbell-Ewald with little practical effect. We can expect courts soon to be faced with these issues.

Justice Ginsburg’s decision was joined by Justices Kennedy, Breyer, Sotomayor, and Kagan. Justice Thomas filed a separate opinion concurring in the judgment. He relied on the common law history of tenders, rather than contract law, to conclude that the defendant’s unaccepted offer did not moot the case. The Chief Justice filed a dissent, joined by Justices Scalia and Alito. The dissent argued that under prior Supreme Court precedents, an offer of complete relief, without any tender of the judgment amount, is itself sufficient to render a case moot. Justice Alito filed a separate dissent, stating that he might have agreed with the plaintiff that the case was not moot had there been reason to think the defendant lacked the means or intent to pay the amount of the settlement offer.

In addition to the mootness question, the Supreme Court also held that the defendant did not possess sovereign immunity on the basis of its work for the U.S. Navy.

You can read more coverage about the case here.

We will continue to keep you posted on class action cases in the Supreme Court and on other notable cases and events.

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U.S. Supreme Court Rebukes California Court for Failing to Enforce an Arbitration Agreement with a Class-Arbitration Waiver

View Mark Hiller’s Complete Bio at RBH.com On Monday, the Supreme Court held in DIRECTV, Inc. v. Imburgia that a California appellate court erred by declining to enforce an arbitration agreement that prohibits arbitration on a class-wide basis. The decision is the latest in a steady line from the Supreme Court chastising lower courts for failing to give effect to arbitration agreements. Perhaps most interesting, the opinion is written by Justice Breyer, who recently authored a dissent arguing that the Supreme Court has expanded the Federal Arbitration Act (FAA) too far. In the Imburgia opinion, Justice Breyer acknowledges his prior dissent but makes clear that the Court’s decisions are the law of the land: While “[l]ower court judges are certainly free to note their disagreement” with Supreme Court precedent, “the judges of every State must follow it.”

We recently previewed Imburgia on this blog. The plaintiffs brought a putative class action in California state court alleging that the defendant, DIRECTV, violated California consumer-protective legislation by imposing large early-termination fees. The DIRECTV service agreement contains a provision requiring consumers to arbitrate their disputes with DIRECTV individually and not on a class-wide basis. The agreement further provides, however, that if the “law of your state” makes the waiver of class arbitration unenforceable, then the entire arbitration provision is unenforceable, thus permitting consumers to litigate their disputes with DIRECTV in court.

When the plaintiffs filed their lawsuit in 2008, existing California law held that class-arbitration waivers like the one in DIRECTV’s service agreement were unenforceable. Therefore, per the terms of the service agreement, the entire arbitration provision was unenforceable. In 2011, however, the U.S. Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the California law is preempted by the FAA. In light of Concepcion, DIRECTV moved to stop the litigation and compel arbitration on an individual basis.

The California trial court denied DIRECTV’s motion, and the California Court of Appeal affirmed. The Court of Appeal focused on the provision of the service agreement making the arbitration agreement unenforceable if the “law of your state” makes the waiver of class arbitration unenforceable. The court acknowledged that, after Concepcion, California law does not prohibit DIRECTV’s class arbitration waiver. But, applying California contract law, the court interpreted the words “law of your state” to mean California law without regard to whether that law is preempted. Because pre-Concepcion California law made DIRECTV’s class-arbitration waiver unenforceable, the court held that the entire arbitration agreement is unenforceable.

The U.S. Supreme Court reversed, holding that the arbitration agreement must be enforced. The Court began its analysis by conceding that the parties to the agreement were free to define the words “law of your state” however they like, including, “[i]n principle,” “by the law of Tibet, the law of pre-revolutionary Russia, or (as is relevant here) the law of California . . . irrespective of that [law’s] invalidation in Concepcion.” The Court further acknowledged that because the meaning of “law of your state” is a question of state law, and the Supreme Court reviews only federal law issues, the Court will accept the Court of Appeal’s interpretation of those words. Nonetheless, the Court stated, the FAA prohibits courts from discriminating against arbitration agreements by applying state law principles to such agreements in a manner different from how courts would apply those principles to other agreements. The Court concluded that the Court of Appeal’s interpretation of the words “law of your state” is unique to arbitration contracts and therefore is preempted by the FAA.

The Court gave several reasons for its conclusion. First, the Court said that the phrase “law of your state” unambiguously means valid state law. Second, consistent with this, California case law provides that references to California law incorporate retroactive legislative changes to that law. Third, “nothing in the Court of Appeal’s reasoning suggests that a California court would reach the same interpretation of ‘law of your state’ in any context other than arbitration.” Fourth, the language the Court of Appeals used when discussing California interpretive principles focused on arbitration. Fifth, the Court of Appeal’s reasoning implies that preempted state law maintains legal force—a view the Supreme Court said is unlikely to be accepted by courts or outside of the arbitration context. And finally, “there is no other principle invoked by the Court of Appeal that suggests that California courts would reach the same interpretation of the words ‘law of your state’ in other contexts.”

Justice Ginsburg wrote a heated dissent, which Justice Sotomayor joined. Much of the dissent—which, at 14 pages, is three pages longer than the majority opinion—focuses on what Justice Ginsburg believes is the Court’s improper expansion of the FAA. She opens her dissent by stating that “[i]t has become routine, in a large part due to this Court’s decisions, for powerful economic enterprises to write into their form contracts with consumers and employees no-class-action arbitration clauses.” The Court’s decisions, she states, “have predictably resulted in the deprivation of consumers’ rights to seek redress for losses, and, turning the coin, they have insulated powerful economic interests from liability for violations of consumer-protection laws.” With respect to this case, Justice Ginsburg says it is clear that when DIRECTV originally drafted the service agreement, DIRECTV meant the words “law of your state” to mean state law without regard to federal preemption. And, to the extent “law of your state” is ambiguous, Justice Ginsburg says that the ambiguity should be resolved against DIRECTV because DIRECTV could have avoided the ambiguity through more precise drafting. According to Justice Ginsburg, the Court reaches its holding by substituting its interpretation of “law of your state” for the Court of Appeal’s. Justice Ginsburg says that, in doing so, the Court’s decision “steps beyond” its precedents and is a “dangerous first.”

As noted, it seems meaningful that Justice Breyer, in particular, authored the majority opinion. He was the lead dissenter in Concepcion, where he, joined by Justices Ginsburg, Sotomayor, and Kagan, argued that “the Court is wrong” to hold that the FAA preempts California’s prohibition on certain class-action arbitration waivers. Now, in Imburgia, Justices Breyer and Kagan have moved to the majority, while Justices Ginsburg and Sotomayor remain as dissenters. In the Imburgia opinion, Justice Breyer acknowledges his prior dissent but emphasizes that Concepcion is controlling law: “The fact that Concepcion was a closely divided case, resulting in a decision from which four Justices dissented, has no bearing on [the] undisputed obligation” that “the judges of every State must follow it.” This portion of the opinion reads almost like a personal note to lower court judges who may hesitate to enforce arbitration clauses with class action waivers. The most lasting effect of Imburgia, therefore, may be to chasten such judges from resisting Concepcion.

Finally, Justice Thomas wrote a brief dissent reaffirming his view that the FAA does not apply to proceedings in state courts.

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Preview of Significant Class Action Cases Pending in the U.S. Supreme Court

View Mark Hiller’s Complete Bio at RBH.comThe Supreme Court began its new Term on October 5, and already the Court is slated to hear several cases that could have major impacts on class-action litigation. Among the issues facing the Court are:

▪ whether a defendant can render a putative class action moot by offering the named plaintiff all the relief the plaintiff could recover individually if the plaintiff were to prevail, even if the plaintiff rejects the offer (Campbell-Ewald Company v. Gomez);

▪ whether a plaintiff has standing to bring a claim (including a class claim) where the plaintiff’s statutory rights were violated, but the plaintiff did not suffer any “real world” injury (Spokeo, Inc. v. Robins);

▪ whether a class may be certified under Federal Rule of Civil Procedure 23(b)(3) where the plaintiff relies on statistical evidence that assumes that each class member is identical to the average observed in a sample, and where some class members did not suffer any injuries at all (Tyson Foods, Inc. v. Bouaphakeo); and

▪ the extent to which courts may strike down arbitration agreements as unenforceable, thereby allowing plaintiffs to proceed in the courts through class actions (MHN Government Services, Inc. v. Zaborowski and DIRECTV, Inc. v. Imburgia).

In this post we describe what is at stake in each case. We will follow the cases throughout the Term and update you in future posts as they are decided or if the Supreme Court grants additional cases of interest.

Campbell-Ewald Company v. Gomez

Sometimes referred to as the “pick off” case, Campbell-Ewald Company v. Gomez addresses the following scenario: What happens if, before a class is certified, the defendant offers to pay the named plaintiff everything the plaintiff could recover individually if the plaintiff prevailed in the lawsuit, but the plaintiff rejects the offer? In particular, does the defendant’s unaccepted offer moot the plaintiff’s individual claim? And if so, does it also moot the class claim? These questions are highly consequential to the many class actions in which a plaintiff’s individual damages are a fraction of the defendant’s prospective litigation costs and class-wide liability, giving the defendant a strong incentive to “pick off” the named plaintiff with an offer of complete relief.

The case arises from a putative class action that the plaintiff filed under the Telephone Consumer Protection Act after he received an unwanted text message from a company hired to recruit for the U.S. Navy. The statute caps damages at $1,500 for each unsolicited message a defendant sends, but because of the large size of the putative class (some 100,000 individuals), the defendant’s potential liability in this case could stretch well into the nine figures. Before the plaintiff moved to certify the class, the defendant offered him $1,503 (just over the statutory cap for damages). The plaintiff rejected the offer, but the defendant argued that the offer nonetheless mooted both the plaintiff’s individual claim and the class claim. In the defendant’s view, because the plaintiff was being offered everything he could recover if he prevailed in the lawsuit, there was no longer any dispute to resolve, and hence no “case or controversy” under Article III of the U.S. Constitution.

The district court and Ninth Circuit rejected the defendant’s argument, and the Supreme Court heard oral argument on October 14. This is the second time in as many years that the Supreme Court has faced the question whether an offer of complete relief moots a plaintiff’s claim. In Genesis Healthcare Corporation v. Symczyk, 133 S. Ct. 1523 (2013), which involved a collective action under the Fair Labor Standards Act, a five-Justice majority (consisting of Chief Justice Roberts and Justices Scalia, Kennedy, Thomas, and Alito) declined to decide the issue, holding that it was not properly presented. Justice Kagan issued a heated dissent, joined by Justices Ginsburg, Breyer, and Sotomayor. She said that the Court should have reached the question and held that an unaccepted offer “will never” moot a plaintiff’s individual claim. On October 14, the Justices squared off again, with Justice Kagan peppering the defendant’s counsel with skeptical questions, and the Chief Justice and Justice Alito doing the same of the plaintiff’s counsel. Justice Breyer expressed interest in a possible middle ground: Whether, even if the defendant’s mere act of offering complete relief to a plaintiff does not moot the plaintiff’s claim, the claim would become moot if the defendant actually deposits with the court the amount of money representing complete relief.

(In addition to the knotty class action questions above, Campbell-Ewald also presents an entirely separate question relating to the somewhat obscure topic of derivative sovereign immunity. Although the Court expressed little interest in this issue at oral argument, it is possible that the Court could once again skirt the class action questions by holding that the defendant in Campbell-Ewald (a U.S. Navy contractor) is immune from suit.)

Spokeo, Inc. v. Robins

Like Campbell-Ewald, Spokeo, Inc. v. Robins also presents a question of constitutional standing: Whether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute.

The plaintiff in Spokeo alleged that the defendant, a website operator that provides users with personal information about other individuals, violated the Fair Credit Reporting Act (FCRA) by publishing false information about him and by failing to send certain required notices to third parties. The plaintiff brought an action on behalf of himself and a putative class of millions of members, putting the defendant’s prospective damages in the billions of dollars.

In his complaint, the plaintiff alleged that the defendant’s actions injured him by harming his employment prospects and by causing him related anxiety. The district court held that these asserted injuries were insufficient to confer standing on the plaintiff. The Ninth Circuit reversed, but on much broader grounds. It held that the defendant’s alleged violation of the statute was itself sufficient to confer standing, even if the plaintiff did not suffer the injuries alleged in his complaint, or any other injury beyond the statutory violation.

The defendant argues that such “injury in law” is insufficient to create standing, unless it is accompanied by a real-world “injury in fact.” The Supreme Court faced this same question three years ago in First American Financial Corporation v. Edwards, 132 S. Ct. 2536 (2012), but the Court dismissed that case as improvidently granted. (As is customary, the Court provided no explanation for why it dismissed the case.) The defendant in Spokeo argues that the issue has only grown in importance since then, as evidenced by the numerous FCRA class actions that have been filed, the large damages at stake, and the number of other federal statutes that, like FCRA, provide for statutory damages apart from actual damages. Oral argument took place on November 2.

Tyson Foods, Inc. v. Bouaphakeo

In Tyson Foods, Inc. v. Bouaphakeo, the Supreme Court will probe the scope of Rule 23(b)(3) class actions and its recent, high-profile decisions in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), and Comcast Corporation v. Behrend, 133 S. Ct. 1426 (2013). This case arises from an overtime pay dispute brought by employees at a meat-packing plant in Iowa. A jury awarded class-wide damages of some $3 million after finding that the defendant failed to pay the plaintiffs for time spent putting on (donning) and taking off (doffing) their work equipment, as well as for time spent walking to their work stations.

What landed the case in the Supreme Court is the method the plaintiffs used to prove class-wide liability and damages. The problem the plaintiffs faced was that the class members spent different amounts of time donning, doffing, and walking. As a result, they were entitled to different amounts of overtime pay, and in some cases, to none at all. The plaintiffs accounted for these differences by having one of their experts study a sample of employees and compute an “average” amount of time that plaintiffs spent donning, doffing, and walking. Another expert then calculated damages on a class-wide basis by assuming that every employee spent the average amount of donning, doffing, and walking time, even though any particular employee may have spent more or less time than the average. The plaintiffs’ expert acknowledged that this methodology resulted in there being at least 212 members in the class who did not suffer any damages because they were not entitled to overtime.

The defendant argues that the class should not have been certified because common questions of fact or law did not predominate over individual ones, as required by Rule 23(b)(3). The Court will hear oral argument on November 10, and it has granted cert on two issues: First, whether a class action may be certified under Rule 23(b)(3) where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and second, whether a class may be certified when it contains members who were not injured and thus have no legal right to damages. The Court has further agreed to hear these issues as they relate to the certification of collective actions under the Fair Labor Standards Act.

The Arbitration Cases: MHN Government Services, Inc. v. Zaborowski and DIRECTV, Inc. v. Imburgia

Finally, the Supreme Court will hear two cases dealing with the intersection of class actions and arbitration agreements. In both cases, California courts (one state, one federal) held that the defendant’s arbitration agreement was unenforceable, and thus that the plaintiffs’ class actions could proceed in court.

In MHN Government Services, Inc. v. Zaborowski, the Ninth Circuit held that certain provisions of the arbitration agreement were unconscionable under California law. Instead of severing those provisions, however, the court affirmed the district court’s decision not to enforce any part of the arbitration agreement.

In DIRECTV, Inc. v. Imburgia, the arbitration agreement prohibited class-wide arbitration, but further provided that if “the law of your state” would find this prohibition unenforceable, then the entire arbitration agreement is unenforceable. Prior to 2011, California case law treated such class-arbitration bans as unenforceable, but in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court held the case law preempted by the Federal Arbitration Act. Nonetheless, in Imburgia, the California state court held that the words “the law of your state” refer to California law without regard to whether the law is invalid (which it is, in light of Concepcion). Accordingly, the court declined to enforce the arbitration agreement.

The defendants in Zaborowski and Imburgia argue that the decisions reflect a judicial hostility to arbitration agreements held by California state and federal courts. Oral argument in Zaborowski has not yet been scheduled. Oral argument in Imburgia took place on October 6. The Justices made little effort to hide their view that the California court misinterpreted the meaning of the words “law of your state.” (As Justice Kagan put it: “[The state court] probably got the answer wrong. Strike the ‘probably.’ Got the answer wrong.”) But the bulk of oral argument was spent on the threshold question whether the Supreme Court has authority to hear this case in the first place, since the meaning of the words “law of your state” is a matter of state law, and the Supreme Court reviews federal law. The plaintiffs suggested in their briefing that the Court therefore may wish to dismiss the case as improvidently granted, which, given the tenor of oral argument, may be the best outcome the plaintiffs can hope for.

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NC Court of Appeals Approves Payments of Attorneys’ Fees in Class Action Settlements

View Mark Hiller’s Complete Bio at RBH.comCan a class action settlement agreement contain a fee-shifting provision that provides for a payment of attorneys’ fees? In a question of first impression, the North Carolina Court of Appeals said yes, subject to a trial court’s approval of the settlement at a fairness hearing.

In the long-running Ehrenhaus v. Baker case, the Plaintiff brought a class action challenging the merger of Wells Fargo and Wachovia. The parties ultimately entered into a settlement agreement that also provided for a payment of attorneys’ fees to Plaintiff’s counsel. The trial court approved the settlement, but two shareholders objected.

In Ehrenhaus I, the Court of Appeals affirmed the approval of the settlement but remanded the case for additional findings regarding the attorneys’ fees. The Court’s remand implicitly indicated that a defendant could agree to pay fees to plaintiffs’ counsel in settling a class action, subject to court approval. But some of the language in Ehrenhaus I had raised questions about the trial court’s authority regarding fees and how the American Rule—which generally requires litigants to bear their own expenses—applies (or does not apply) in class actions. On remand, after receiving additional evidence, the trial court issued an order approving the payment of attorneys’ fees to plaintiffs’ counsel, and the two objecting shareholders appealed again.

This Tuesday, in Ehrenhaus II, the Court of Appeals rejected this challenge to the trial court’s decision on fees. The Court began by laying out the law related to fee-shifting. Under the “American Rule,” the Court explained, “a successful litigant may not recover attorneys’ fees . . . unless such a recovery is expressly authorized by statute,” and here it was not. The Court then identified two exceptions to the American Rule in the class action context, but concluded that neither applied. First, under the “common fund doctrine,” a “litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorneys’ fee from the fund as a whole.” The Court said that this doctrine did not apply here because Plaintiff’s lawsuit did not result in the establishment of a common fund. Second, under the “common benefit” doctrine, even if no common fund is created, “an award of attorneys’ fees to a litigant’s counsel is permissible when that litigant confers a common monetary benefit upon an ascertainable stockholder class in a shareholder action.” North Carolina, however, has declined to adopt the common fund doctrine.

Although neither the common fund nor common benefit exceptions to the American Rule applied, the Court of Appeals held that the award of attorneys’ fees was permissible. That is because, the Court held, “the award of attorneys’ fees in this case did not trigger the operation of the American Rule” because the fee award “was provided for in a voluntary settlement between the parties.” The Court explained that “our caselaw expressly recognizes the enforceability of settlement agreements providing for the payment of one party’s attorneys’ fees by the other party to the lawsuit.” That rule furthers the “well-established policy of encouraging the settlement of disputes between litigants and is therefore permissible despite a lack of explicit statutory authorization for such an award.”

The Court acknowledged that this was the first time the Court has addressed whether this rule applies in the class action context, which presents “unique” concerns because not all class members will participate in negotiating the settlement or be before the court. Hence, the Court noted, “the settlement of class actions—unlike settlements in ordinary civil actions—must be judicially approved” pursuant to North Carolina Rule of Civil Procedure 23(c), which requires the court to hold a hearing to determine whether the proposed settlement is fair, reasonable, and adequate. But the Court found no “persuasive argument as to why a trial court’s ability to evaluate the fairness and reasonableness of a class action settlement does not include the concomitant ability to determine whether a provision in such a settlement authorizing the payment of attorneys’ fees is likewise fair and reasonable.”

Accordingly, the Court held that “the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is—like all other aspects of the settlement—subject to the trial court’s approval in a fairness hearing. During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.”

The Ehrenhaus II decision also addresses an important appellate procedure question regarding Business Court appeals. For more on this issue, see Ehrenhaus Is Here To Stay from the N.C. Appellate Practice Blog.

(Robert Fuller and Adam Doerr of our firm represented the Defendants in this litigation.)

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