Posted on: 5/4/2012
Gregory R. Farkas, Inna Shelley
View Latest Articles
Members of DRI and readers of the Business Suit are likely familiar with the Supreme Court decision in Wal-Mart Stores, Inc. v. Dukes, __ U.S. __, 131 S. Ct. 2541 (2011) ("Wal-Mart"). Since Wal-Mart was released in June
, 2011, it has revolutionized federal class action practice, as reflected in hundreds of citations to the decision by federal courts. Wal-Mart also generated enormous interest in the academic and legal communities, and the decision has been discussed in countless articles, client alerts and CLE presentations.
So, is there any need for yet another article discussing Wal-Mart? Yes, indeed! Despite the attention the decision has received, Wal-Mart's potential significance for the certification of state court class actions has been comparatively under-analyzed. As discussed below, federal class certification precedent has considerable potential relevance to state court class certification decisions.
Yet, as of the submission of this article, only a handful of reported state court decisions have made more than passing reference to Wal-Mart. This article attempts to survey those cases and suggests areas where Wal-Mart's significance to state court class certification decisions should be further explored.
I. Lessons from Wal-Mart.
A few of the lessons from Wal-Mart are worth briefly noting before discussing the state court cases applying the decision:
A. Rigorous Analysis, Probing Behind the Pleadings and Inquiry Into the Merits.
Prior to Wal-Mart, a common issue facing every class action practitioner was the tension between the need to conduct a "rigorous analysis" of the required elements for class certification that probed beyond the parties' pleadings, and the caution that a trial court should not consider the merits of the parties' dispute in deciding class certification. In Wal-Mart the Supreme Court finally (and thankfully) resolved this tension.
The Court explained that, while a court does not conclusively decide the merits at the class certification stage, rigorous analysis of the Rule 23 elements is required, including touching aspects of the merits. 131 S. Ct. at 2552. It specifically rejected the notion that Rule 23 sets forth "a mere pleading standard" and rejected arguments that a trial court must accept plaintiffs' allegations as true at the class certification stage. Id. at 2551.
B. The Renewed Importance of the Rule 23(a) Commonality Requirement.
The most controversial holding of Wal-Mart was the 5-4 ruling that that the proposed class did not meet the "commonality" requirement of Fed. R. Civ. P. 23(a)(2). The majority opinion rejected the notion that the commonality requirement is easily satisfied, holding that reciting a list of common questions shared among a class is insufficient to certify a class.
Instead, commonality requires class members to show that they have suffered the same injury, not just violations of the same law. Id. at 2551. The Court explained that "[w]hat matters to class certification . . . is not the raising of common 'questions' – even in droves – but rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers." Id. at 2551, quoting R.A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U.L. Rev. 97, 132 (2009).
C. The Due Process Limitation on Application of Rule 23(b)(2) to Claims for Monetary Relief.
A final important lesson of Wal-Mart was the Court's unanimous rejection of certification under Fed. R. Civ. P. 23(b)(2). Wal-Mart held that Rule 23(b)(2), which permits class actions for injunctive or declaratory relief, did not allow a claim for monetary relief in the form of back pay. Wal-Mart, 131 S. Ct. at 2558. The Court rejected the plaintiffs' argument that a Rule 23(b)(2) class was properly certified because claims for back pay did not predominate over requests for declaratory and injunctive relief. Id. at 2559.
In rejecting this "predominance" test for Rule 23(b)(2) certification, the Court recognized the due process concerns inherent in certifying claims for monetary relief as part of a no opt-out, mandatory class under Rule 23(b)(2). The Court refused to interpret Rule 23(b) to nullify procedural notice and opt-out protections whenever plaintiffs choose to combine their request for money damages with even a "predominating" request for injunctive or declaratory relief. Id.
Because the Court determined that the requested back-pay relief was not incidental, it did not decide whether Fed. R. Civ. P. 23(b)(2) is limited to classes requesting only declaratory or injunctive relief, although some language suggested that this may be the case. Id. at 2559-60 (commenting that "[w]hile we have never held [that due process is violated] where monetary claims do not predominate, the serious possibility that it may be so provides an additional reason not to read Rule 23(b)(2) to include the monetary claims here").
II. Why Does Wal-Mart Matter for State Court Class Actions?
The holdings of Wal-Mart are obviously of crucial relevance to any federal class certification analysis. But why do they matter in state court class certification proceedings? After all, Wal-Mart was decided under Fed. R. Civ. P. 23, and state courts have their own procedural rules for class certification.
There are at least two answers to this question. First, most state court class certification rules are closely modeled after the federal rule. A quick review of the 2011 DRI Class Action Compendium (and, yes, this is a shameless plug!) reveals that over 40 states have class certification procedures that are modeled in some fashion on Fed. R. Civ. P. 23 and that federal precedent is recognized in these jurisdictions as "persuasive," "helpful," and "instructive". In these jurisdictions, the relevance of Wal-Mart is apparent.
However, even in jurisdictions with different procedural rules, Wal-Mart still can be extremely significant. One of the critical lessons of Wal-Mart is that limitations on class certification are grounded on significant policy and due process concerns. See, e.g., 131 S. Ct. at 2558-59. The Supreme Court unanimously recognized that the class action mechanism could not be used to abridge, enlarge or modify substantive rights, citing to the Rules Enabling Act. Id. at 2561.
The constitutional and policy rationales underlying Wal-Mart should have force even in jurisdictions that do not explicitly follow federal procedure. These policy and constitutional arguments also can be persuasive in explaining Wal-Mart'sapplication to a given fact pattern.
III. What Have State Courts Done with Wal-Mart to Date?
As noted above, federal courts have frequently applied Wal-Mart, often marshaling its facts and analysis to deny class certification. As of this writing, however, only appellate court decisions in California, Colorado, Florida, Kansas, Louisiana, Montana, North Carolina, and Ohio have considered one or more of Wal-Mart's holdings in any detail.
A. Probing Behind the Pleadings and Rigorous Analysis under State Analogues to Rule 23.
State appellate courts have cited Wal-Mart for the proposition that trial courts must conduct a "rigorous analysis" of the evidence establishing each class certification requirement and for the proposition that such an analysis will often overlap with the merits of the plaintiffs' claims. Jackson v. Unocal Corp., 262 P.3d 874, 885 (Colo. 2011); State Farm Mut. Auto. Ins. Co. v. Reyher, 2011 Colo. LEXIS 844, *18-19 (Colo. Oct. 31, 2011); Price v. Martin, 2011 La. LEXIS 2889, *9-10 (La. Dec. 6, 2011); Marler v. E.M. Johansing, LLC, 199 Cal. App. 4th 1450, 1458 (Cal. App. 2d Dist. 2011).
In Jackson v. Unocal, the Colorado Supreme Court considered whether Colorado's Rule of Civil Procedure 23 permitted the trial court to resolve expert disputes relevant to class certification. 262 P.3d 874. Jackson allowed certification of a class of landowners who brought tort actions against the defendant for asbestos contamination of their properties.
The court held that "rigorous analysis" of evidence supporting class certification required consideration of "both an expert's testimony and the underlying evidence supporting that testimony. The trial court must consider any evidentiary disputes –including expert disputes –that are relevant to the C.R.C.P. 23 requirements." Id. at 885.
However, courts do not need to determine which expert will ultimately prevail, the key inquiry being whether it appears that the experts offer evidence that can be intelligently presented and evaluated within the procedural framework of a class action. Id. at 886.
While citing Wal-Mart for its holding that inquiry into the merits of claims affecting certification decisions is appropriate, Jackson did not discuss dicta in Wal-Mart that suggested that the requirements of Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993)may apply to expert testimony at the certification stage. Jackson held that trial courts are not required to determine whether the expert's evidence will be admissible at trial and do not need to hold a full Daubert or similar hearing to evaluate the expert testimony prior to certification. Id.
Instead, aftercertification, a trial court may hold a hearing to evaluate the expert testimony and determine whether the plaintiffs have an admissible class-wide theory of proof that can be presented to the jury at trial. Id. at 887. Jackson deemed such a delay acceptable because the court has a continuing obligation to review whether proceeding as a class is appropriate. Id. at 886-87. Jackson found that the trial court undertook a sufficiently "rigorous analysis" of competing expert testimony for class certification purposes by hearing testimony from one of the experts at the certification hearing, reviewing deposition submissions from each party regarding the experts' opinions, and reflecting a summary and evaluation of the expert opinions and evidentiary bases for the opinions in the court order. Id. at 888.
State Farm Mut. Auto. Ins. Co. v. Reyher, decided by the Colorado Supreme Court on the same day as Jackson, also cited Wal-Mart for its holding that trial courts may analyze issues overlapping with the merits to determine whether class certification is appropriate. 2011 Colo. LEXIS 844 at *18-19. Reyher involved a dispute regarding an insurer's payment of medical bills under Colorado's No-Fault Act.
A key issue relevant to plaintiffs' classwide theory of proof as well as the merits of the case was whether the insurer's failure to pay could be attributed to its alleged sole reliance on an inaccurate database. Id. at *19. The trial court only considered the issue to satisfy itself that plaintiffs failed to establish the insurer's sole reliance on the database with common proof. Id. Class status was properly denied because individual issues predominated, and plaintiffs lacked a class-wide theory of liability. Id. at *20.
B. Proving Commonality.
State court decisions have also looked to Wal-Mart for guidance on establishing the commonality requirement for class certification. One example is Critchfield Physical Therapy v. Taranto Group, Inc., 293 Kan. 285, 295, 263 P.2d 767 (2011). In Critchfield, the Kansas Supreme Court allowed certification of a class of consumers to whom the defendant allegedly sent unsolicited fax transmissions in violation of the federal Telephone Consumer Protection Act (TCPA). The defendant claimed that the need to determine whether class members consented to receiving the fax transmissions prevented a finding of commonality.
The Court held, as in Wal-Mart, that to establish commonality the plaintiffs had to demonstrate that class members suffered the same injury and that their claims depended on a common contention capable of class-wide resolution. Id. at 295. However, class certification was permitted because the litigation "would yield common answers to common questions" raised by the class. Id. at 297. If the defendant later demonstrated that some class members consented to the fax transmission, excepting them from the TCPA, those members could be removed individually without upsetting the class status. Id.
In Price v. Martin, 2011 La. LEXIS 2889 (Dec. 11, 2011) the Louisiana Supreme Court denied class certification to land owners whose property was damaged by a wood treatment plant. Plaintiffs failed to establish commonality under Wal-Mart's requirements of "rigorous analysis" and "significant proof" of a common contention tying the class claims. Id. at *10-11, *20.
In Price, issues of causation and breach of the applicable standard of care in allowing emissions could not be resolved on a class-wide basis with common evidence. Id. at *20. Specifically, plaintiffs could not show breach because the facility operated under three owners at various times and, depending on the nature of the emission, different owners could be responsible. Id. at *20-21. Plaintiffs failed to demonstrate common causation because they could not present significant proof that the defendant's facility was the source of the contaminants on the property of each class member, as opposed to alternative sources in the class area. Id. at *23-24.
In Florida, class certification was denied in Tire Kingdom, Inc. v. Dishkin, 2011 Fla. App. LEXIS 10550 (Fla. Dist. Ct. App. 3d Dist. July 6, 2011). In Tire Kingdom, some customers used a coupon to purchase services from a car care company or received discounted services without the coupon. However, the coupon and related advertisements did not reveal that an additional "shop-fee" would be charged on services provided.
Plaintiffs attempted to certify a class of customers who used the coupon that failed to reveal the shop fee as well as those who "benefited" from such a coupon by receiving discounted services without presenting the coupon. Id. at *24. The appellate court held that the trial court improperly delved into the merits in its assessment of commonality when it concluded that customers were victims of overcharges. Id. at *19-21.
The court then noted that the alleged common questions were actually recitations of ultimate legal issues indistinguishable from those found to be insufficient in Wal-Mart. Id. at *23, n.12. The claimants sought relief for violations of consumer protection laws that required proof of a deceptive act or unfair practice, causation, and actual damages. Id. at *26.
The court noted that each member's experience at the shop was different, including the precise language of the advertisements, awareness of shop fee signs in the store, and conversations with employees. Id. at *28, *35 (trial courts should hesitate to certify class actions in complex cases like this one where no one set of facts establishes liability, no single proximate cause applies to each defendant, and individual issues outnumber common ones); c.f.Gaston v. Schering-Plough Corp., 2011 Cal. App. Unpub. LEXIS 5974 (Cal. App. 2d Dist. Aug. 9, 2011) (Wal-Mart did not affect the court's analysis where manufacturers made uniform misrepresentations on sunscreen labels and injury depended on application of the reasonable person standard and not on reasons for particular purchasing decisions).
C. Monetary Relief in Rule 23(b)(2) Style Class Actions.
State courts have also looked to Wal-Mart to decide whether class actions can proceed under state analogues of Rule 23(b)(2). The Montana Supreme Court addressed this issue in Diaz v. Blue Cross & Blue Shield, 363 Mont. 151 (2011). In Diaz, the plaintiffs proposed a class of employees injured in vehicle collisions whose medical expenses were paid by the other drivers' insurers and whose own state insurer refused to cover the same expenses based upon a policy exclusion. The class members sought certification in order to determine whether Montana's make-whole insurance laws required the insurance plan to conduct a made-whole analysis before exercising the applicable policy exclusion to deny payment.
The Montana Court of Appeals in Diaz held that the class could not be certified under M. R. Civ. P. 23(b)(2) because it required individualized made-whole assessments as to each insured. The Montana Supreme Court disagreed, holding that the lower court erroneously dove into the merits of the eventual made-whole claims, which were beyond the scope of the class action. Id. at 164.
The Montana Supreme Court, citing Wal-Mart, recognized that Rule 23(b)(2) does not authorize class certification when each class member would be entitled to an individualized award of monetary damages, or to a different injunction or declaratory judgment against the defendant. Id. at 162-63. Diaz deemed that the class seeking only declaratory and injunctive relief that would resolve a common procedural question –whether state law permitted the state insurer to withhold payments before conducting a made-whole analysis- and a ruling to compel compliance with the proper practice. Id. at 164.
Any individual inquiry regarding whether class members had been made whole would not occur in the context of the claim. Id. Diaz did not address Wal-Mart's open question of whether merely "incidental" individualized monetary relief would preclude certification under the state analogue to Montana's Rule 23(b)(2). Instead, the court downplayed doubts about the nature of the individualized "make-whole" relief by placing it outside the scope of the class inquiry.
In Ford Motor Credit Co. v. Agrawal, an Ohio Court of Appeals held that a class action could be certified under both Ohio Civ. R. 23(B)(2) and (B)(3), stating simply that Wal-Mart did not address the issue. 2011 Ohio 6474, ¶¶ 65, 67 (Ohio Ct. App., Cuyahoga County Dec. 15, 2011). Agrawalinvolved a challenge to the company's vehicle inspection policy at the end of the lease term. The court allowed certification of classes for claims of breach, fraud, and violations of the Consumer Leasing Act (CLA).
With respect to the Rule 23(B)(3) class, the court held that "incidental" damages are defined as those that "flow directly from liability to the class as a whole on the claims forming the basis of injunctive or declaratory relief." Id. at ¶ 67 The court justified using this test by noting that, under Ohio Rule 23(C)(4)(a), it had the power to limit the class action to issues relating to the injunction and permit individualized damage issues to be tried separately. Id. at ¶ 66.
Without additional discussion, the court stated that the action could be maintained under both 23(b)(2) and (23(b)(3). Id. Although acknowledging that Wal-Mart raised concerns about due process notice and opt-out protections not afforded to mandatory classes, the court seemingly determined, without elaboration, that certification under both provisions would address this issue as to individualized monetary relief. Id. at ¶ 65. See also Cullen v. State Farm Mut. Auto. Ins. Co., 2011 Ohio 6621, P48, P50 (Ohio Ct. App., Cuyahoga County Dec. 22, 2011) (applying same analysis).
While these Ohio rulings pay lip service to Wal-Mart, their holdings are difficult to reconcile with the concerns expressed by the Supreme Court about the constitutionality of no opt-out class actions under the more limited protections of Fed. R. Civ. P. 23(b)(2) and its state law equivalents.
In North Carolina, Ehrenhaus v. Baker permitted the certification of a no opt-out class of a bank's common stockholders challenging a merger with another bank. 717 S.E.2d 9 (N.C. Ct. App. 2011). Although certification was permitted under N.C. R. Civ. P. 23, the Court of Appeals discussed and distinguished the due-process concerns raised in Wal-Mart.
The court acknowledged that Wal-Mart signaled that "mere predominance" of a proper Fed. R. Civ P. 23(b)(2) claim for injunctive or declaratory relief does not cure notice and opt-out problems. Id. at 24. However, it noted that Wal-Mart did not address whether any form of monetary relief, including incidental relief, could comply with due process requirements. Id. The court cautioned that, after Wal-Mart:
[C]ourts must be more careful –more careful than they have previously been –to protect class members' due process rights when monetary claims are involved. Wal-Mart Stores also establishes that the claims pled by the named plaintiff are not the only claims that must be considered. It is critical that courts determine whether it offends due process to preclude monetary claims that are not pled as a basis for relief. Id.
However, the court rejected the defendant's arguments that certain claims for damages may have been precluded because the arguments were not brought before the trial court and held that the no opt-out class at issue did not violate due process. Id.
Eight months after Wal-Mart, state courts have tentatively begun to apply its holdings to their own class-action jurisprudence. Few state decisions have delved into the facts of Wal-Mart at any length, with most merely citing to Wal-Mart for the general standard for class certification.
It appears that Wal-Mart has improved state courts' recognition of the need for "rigorous analysis" of the elements for class certification and the need to probe behind the pleadings to conduct this analysis. However, the policy and constitutional concerns about aggregate litigation and trial by formula that are the foundation Wal-Mart have received less attention in the reported cases.
In particular, the significant concerns regarding no opt-out class actions involving money damages under analogues to Fed. R. Civ. P. 23(b)(2), while acknowledged in passing, have not resulted in a greater reluctance to certify such classes. Indeed, current state decisions citing Wal-Mart on the topic of remedies interpret it to allow certification of re-defined "incidental relief" classes including "equitable" monetary damages stemming from declaratory and injunctive relief. These constitutional and policy arguments deserve greater attention and should be an important component of any analysis applying Wal-Mart in state court proceedings.
Gregory Farkas and Inna Shelley are with the law firm of Frantz Ward LLP in Cleveland, Ohio. Greg's practice encompasses a variety of litigation matters, including the defense of lender liability and consumer fraud claims. Greg has represented defendants in numerous class actions in state and federal courts. Inna handles a variety of commercial litigation matters, including the defense of class action litigation.