For anyone looking for sneak preview, here are the program slides, which were are the result of the joint efforts of my co-presenters, Brian Troyer of Thompson Hine and Rick Preston of Hitachi Consulting, and me.  We hope you can make it!

The case was the first of its kind under 2005 German legislation allowing for special model proceedings in mass actions for certain types of securities fraud, which had been enacted as a direct result of the thousands of individual lawsuits that had been filed against Deutsche Telekom for prospectus fraud after the stock dropped following the secondary offering.  The law that created the group action procedure under which the case was tried is known in English as the Capital Market Model Proceedings Act.  Passed in 2005, the Act allows for the trial court to assign a representative plaintiff in a model proceeding that is to be tried first while similar claims are suspended.  The purpose of the model proceeding is to resolve any generic or common issues for all of the cases, but unlike in a U.S. class action, the model proceeding does not have the legal effect of also resolving all of the individual claims.  As a result, although today’s ruling is a victory for the defendant, it does not represent an end to the litigation even if it is upheld on appeal.

This article from Karin Matussek in BusinessWeek summarizes the decision and its potential implications.  According to the article, the attorney for the model plaintiffs has stated that they do plan to appeal.

The case is a “model” proceeding for more than just the resolution of the claims against Deutsche Telekom.  It has been followed by many academics and policymakers in Europe and elsewhere as a test case for the viability of group proceedings in common law jurisdictions.  Time will tell whether the German experiment in group proceedings will be seen as a success.  Concerns that the introduction of group litigation procedures in Europe will usher in a US-style litigation culture will no doubt be tempered by the fact that the defendant ultimately prevailed.  On the other hand, the length of time that the it took for the model proceeding to be resolved raises legitimate questions about the long-term social utility and efficiency of the procedure.   By comparison, class action litigation brought in the United States alleging prospective liability by U.S. investors against Deutsche Telekom arising out of the same offering was settled for more than $120 million more than seven years ago, in 2005.

The German Capital Market Model Proceedings Act and the Deutsche Telekom case are among the many cutting-edge topics addressed in the book World Class Actions, which is still on schedule to be on bookshelves early this summer.  The German chapter is authored by Dr. Luidger Röckrath, attorney with the law firm Gleiss Lutz.  Stay tuned here for more updates on the status of of the book.

Melissa 

It has been almost a year. Could someone tell me, in their opinion, what effect Concepcion has had on consumer class actions over the last 11 months?

According to a recent New York Times article by David Segal titled A Rising Tide Against Class Action Suits, the effect has been significant.  The article cites a report from the consummer advocacy group, Public Citizen, which found 76 opinions relying on Concepcion as a reason to prevent class actions from “moving ahead.”

I have no reason to doubt the accuracy of the number of opinions cited in the Public Citizen report, and there is no doubt that Concepcion has had an impact on class action litigation, both in consumer class actions and in other subject matter areas.  However, I would caution that simply looking at the number of class actions that have been unsuccessful due to class arbitration waivers does not tell the whole story.   Here are a few observations to consider in assessing the impact of Concepcion:

• Concepcion has not been treated by the lower courts as foreclosing all arguments for declaring an arbitration clause invalid.  A case in point is the Second Circuit’s recent decision in In re Amex III., which relied on the federal common law of arbitrability in declaring a class arbitration waiver invalid.
• Class action litigation has been on the decline in substantive areas that are not impacted by arbitration clauses, such as in securties class actions.
• There are many areas of consumer class action litigation that remain unaffected by arbitration clauses because they either involve claims where there may be no contractual relationship between the plaintiff and the defendant, including statutory penalty class actions such as TCPA class actions class actions and certain data privacy class actions, or they involve areas of the law where arbitration clauses are prohibited, including many insurance class actions.  A careful review of the data may show that consumer class action litigation has simply shifted to these areas.
• Recognizing that arbitration clauses do not necessarily provide a magic talisman against class action litigation and that implementing an overly consumer-friendly arbitration clause may actually encourage litigation, not all companies have rushed to adopt arbitration clauses into their consumer contracts.

In summary, I would say that while Concepcion‘s ban on state laws invalidating arbitration clauses has become an important consideration in litigating consumer class actions, it has not brought about their end.

I’d love to hear what readers have to say about their own perspectives on this issue.  Please feel to comment below.

Whether or not you agree with Dean Klonoff’s criticisms from an academic point of view, the article is a must read for anyone looking for a good synopsis of the key developments in the U.S. class action law over the past several years.  From the Class Action Fairness Act to the Supreme Court’s recent decisions in Dukes and Concepcion to slightly less glamorous topics such as the necessity of a precise class definition, Klonoff’s article is impressive in its comprehensive analysis of relevant recent developments.

What to do with unclaimed settlement funds is a common problem facing class action litigants.  There are at least four methods of distributing unclaimed settlement funds:  (1) reversion of unclaimed funds back to the defendant; (2) payment to those claimants who did make claims on a pro rata basis; (3) letting the funds escheat to the state; and (4) a cy pres award to a charitable organization.  All of these methods have been the subject of criticism, but the practical reality is that something has to be done with funds from a class action settlement that are not claimed by class members.

Recently, the First Circuit Court of Appeals issued a decision that outlines the circumstances under which a court may approve a cy pres distribution of unclaimed settlement funds.  In In re: Lupron Marketing and Sales Practices Litigation, Case Nos. 10-2494, 11-1329 (1^st Cir., Apr. 24, 2012), the parties had agreed to a provision that gave the trial court discretion on the distribution of any unclaimed funds from a settlement of claims alleging overcharging for the medication Lupron.  The Court had ordered that $11.4 million in unclaimed funds be distributed to a non-profit cancer center for the purpose of treating diseases for which Lupron was commonly prescribed.  Although the First Circuit expressed “unease with federal judges being put in the role of distributing cy pres funds at their discretion,” it found that the trial court had not abused its discretion.

In reaching this decision, the First Circuit adopted the “reasonable approximation” test for evaluating whether a district court’s cy pres award constitutes an abuse of discretion.  Under the “reasonable approximation” test, which had previously been applied by the Seventh, Eighth, and Ninth Circuits, the Court looks to whether the cy pres distribution is to a recipient that reasonably approximates the interests being pursued by the members of the class.  The Court listed a number of non-exclusive factors to be considered in making this determination:

(1)        the purposes underlying statutes claimed to have been violated;

(2)        the nature of the injury to the class members;

(3)        the characteristics and interests of the class members;

(4)        the geographic scope of the class;

(5)        the reasons why the settlement funds have gone unclaimed; and

(6)        the closeness of the fit between the class and the cy pres recipient.

The opinion more generally has an interesting discussion of some of the policy arguments for and against each potential alternative method of disposing of unclaimed funds.  Relying on the American Law Institute’s Principles of the Law of Aggregate Litigation, the First Circuit rejected the presumption suggested by the concurrence in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5^th Cir. 2011), that any residual funds in a class action settlement should be returned to the defendant.  The Court also cited the ALI Principles in rejecting escheat to the state as the preferred option of disposing of unclaimed settlement funds.  The opinion lists a variety of policy reasons why unclaimed funds should not be given pro-rata to the claimants who do participate, including that this method creates a windfall and leads to perverse incentives to prevent participation in a settlement by absent class members.

Like the Fifth Circuit’s decision in Klier last year, the First Circuit’s decision in In re: Lupron Marketing and Sales Practices Litigation illustrates the need for parties to be specific in the settlement agreement about the means of distributing unclaimed settlement funds.  Failure to take care in specifying how unclaimed funds are to be distributed can lead to additional unwanted and expensive litigation with objectors, and can force the court to make a public policy-driven decision that may be inconsistent with the desires of both parties to the settlement.

• Moving for summary judgment instead of moving to dismiss on the pleadings;
• Moving to strike the class allegations or for an early ruling on class certification, leaving for a later date the matter of the plaintiffs’ individual claim; or
• Simply filing an answer and waiting until the record is more well-developed before raising a potentially dispositive legal argument, either in a later motion for summary judgment or a motion for judgment on the pleadings.

Without question, every defendant has an incentive to obtain resolution of a class action in the quickest, most efficient way possible.  However, filing a motion to dismiss is not the most efficient means of resolution in every case.  If the motion is unsuccessful, the trial court can develop preconceived notions about the strength of the plaintiff’s claims if they are attacked too early based on an undeveloped record.  This is a risk especially where the trial judge has a reputation of denying motions to dismiss without serious analysis.  But beyond the possibility that the motion will be denied, there is a potential downside to winning an early motion to dismiss on the pleadings.  Having to defend a successful motion to dismiss on appeal can be an unnecessary expense in comparison to the available alternatives, and there is a risk of an unfavorable appellate ruling that can cause lasting harm on remand.  Another consideration is that winning a dispositive motion prior to class certification will only bind the named plaintiff and doesn’t bind other class members (although in practice, defendants are usually willing to take the risk of future lawsuits if it means getting the current one dismissed).

There are two common scenarios in which defendants are successful in obtaining early dismissal of class action claims.  The first is where the plaintiff’s underlying legal theory is a novel one.  One recent example is a putative class action filed against New York Law School alleging that the school misrepresented its employment statistics, causing students to attend law school with the hopes of significant employment prospects, only to find themselves with limited job options upon graduation.  A state court recently dismissed the case in a lengthy opinion that relies heavily on factual matters of which the court took judicial notice (link courtesy of www.abovethelaw.com).  Another example is a putative class action in California challenging McDonald’s alleged practice of using toys in Happy Meals to entice children to buy unhealthy food.  That case was dismissed last week, in a written decision that does not contain any analysis of the court’s reasons for sustaining the defendant’s demurrer (presumably, the court articulated the reasons orally). 

There is no particular reason to believe that either of these decisions will be reversed on appeal, but the risk of reversal is present in almost any decision granting a motion to dismiss due to the individual plaintiff’s failure to state a claim.  Even if the plaintiff’s legal theory is novel or borderline frivolous, there is always a danger that an appellate panel, left to analyze the case from the perspective of pure application of the law based on the facts viewed in the light most favorable to the plaintiff, will find that the plaintiff has stated a claim.  This creates the related risk that due to the undeveloped state of the record, the appellate court will make generalized statements about the viability of the cause of action that will make it more difficult to obtain summary judgment or a denial of class certification later.  This risk is most evident where the named plaintiff has alleged facts that, while implausible, would state an individual claim if accepted as true, but where the facts alleged are so individualized to the named plaintiff that they wouldn’t possibly support a common claim on a class-wide basis.  In that situation, it is important to at least consider the alternative approaches of attacking class certification or filing a motion for summary judgment on a more well-developed record.

A second common scenario where defendant can obtain early dismissal of a class action is where there is a possible complete legal defense to the plaintiff’s class claims, but the defense is based on an unsettled question of law.  In that situation, a win in the trial court may only guaranty years of litigation in the appellate courts rather than putting an end to the dispute.  There may be strategic advantages to a defendant testing the legal theory early in the case anyway, but it is always important to consider other approaches.  One situation in which the defendant may be better off waiting to raise a potentially dispositive legal defense is where the facts are likely to show that the plaintiff’s claim is baseless as a matter of fact, so that an early motion for summary judgment may be a more efficient alternative.

Of course, there is no set formula for deciding whether to file an early motion to dismiss.  Instead, the decision requires an analysis of a variety of different variables that will depend on the specific case.  A non-exhaustive list of the factors includes:

• the strength of the legal arguments and the extent to which the law is settled;
• the style and predilections of the trial court judge;
• the extent to which discovery can be limited or stayed if a motion to dismiss is pending;
• the likelihood of reversal given the composition and leanings of the applicable appellate court;
• the existence of alternative defenses, such as those based on facts outside the pleadings;
• the likelihood that the case will survive class certification; and
• the perceived willingness of the named plaintiffs and their attorneys to explore settlement or to abandon the case following an adverse trial court ruling;
• the effect of long-term uncertainty over a challenge to a particular business practice as the case awaits resolution in the appellate courts; and
• the cost of defending the judgment on appeal in comparison to the amount at stake in the litigation.

There are many situations in which the cost and potential long-term risks of seeking an early dismissal are outweighed by the benefits of a quick win in the trial court.   But, while filing an early motion to dismiss is always a strategy to consider, it is important to at least consider alternatives that may be only slightly more costly in the short term and may provide a better foundation for a win in the trial court to remain a win forever.

So, readers may be interested in an upcoming Strafford Publications webinar in which I will be participating on May 23, 2012, entitled Statistics in Class Action Litigation: Admissibility, Expert Witnesses and Impact of Wal-Mart v. Dukes.  For those of you who think that title sounds familiar, this is an update of a Strafford webinar held last year shortly after the Dukes decision was announced.  Find out if our predictions then were at all close to the mark. 

Here’s a link to the Strafford page for the webinar, where you can get more information and register:

http://www.straffordpub.com/products/statistics-in-class-action-litigation-admissibility-expert-witnesses-and-impact-of-wal-mart-v-dukes-2012-05-23

A common temptation in class action litigation is to fashion procedures based on “rough justice” to avoid overburdening the courts or attempting to redress alleged mass harm.  Over the past decade, as storage and computing power have increased exponentially, it has become increasingly tempting to use statistical sampling as a proxy for the actual adjudication of facts in class or mass actions.  The idea is that if the facts regarding a statistically significant subset of a class can be evaluated for a particular issue or set of issues, then the results of the evaluation of the sample can be extrapolated across the rest of the class.

One jurisdiction in particular where this approach has gained traction has been California.  There, the use of statistical sampling has been recognized for several years as a means of apportioning damages in some cases.   See Bell v. Farmers Ins. Exchange (2004) 115 Cal.App.4th 715 [9 Cal.Rptr.3d 544] (Bell III).   However, in recent years, plaintiffs have attempted to use statistical sampling as proof of liability, not simply as a means of apportioning damages when liability has been established or (as in Bell III) it is not contested.  This approach was harshly criticized in Part III of Justice Scalia’s majority opinion in Wal-Mart v. Dukes, (notably, this was the portion of the Dukes opinion with which all nine justices concurred):

The Court of Appeals believed that it was possible to replace such proceedings with Trial by Formula. A sample set of the class members would be selected, as to whom liability for sex discrimination and the backpay owing as a result would be determined in depositions supervised by a master. The percentage of claims determined to be valid would then be applied to the entire remaining class, and the number of (presumptively) valid claims thus derived would be multiplied by the average backpay award in the sample set to arrive at the entire class recovery— without further individualized proceedings. [internal citation omitted].  We disapprove that novel project.

Earlier this year, in Duran v. U.S. Bank National Association, No. A125557 & A126827 (Cal. App., Feb.  6, 2012), a division of the California Court of Appeal agreed with the above-quoted dicta in Dukes and rejected an attempt to use statistical sampling to prove liability an a wage and hour class action.  The plaintiff had presented testimony from statistician Richard Drogin, who had also served as an expert for the plaintiffs in Dukes.  Drogin presented a random sampling analysis that purported to estimate the percentage of the defendant’s employees that had been misclassified for purposes of entitlement to overtime pay.  The trial court adopted a sampling approach that was modeled on (but not exactly the same as) Drogin’s proposal.  

The Court of Appeal held that the trial court’s approach was improper and that it violated defendant’s due process rights for a variety of reasons, including that 1) the use of statistics to estimate the total number of employees who had been misclassified deprived the defendant an opportunity to present relevant evidence and individualized defenses as to individual plaintiffs’ alleged misclassification; 2) the court’s statistical methodology was flawed because it arbitrarily used a sample of 20 employees without any basis for concluding that the sample was statistically significant; 3) even the use of sampling as to damages was improper because the methodology used had an unacceptably high margin of error.

The Duran opinion is worthy of careful study for anyone considering the use of statistics in class certification proceedings, both in the employment context and in other types of class actions.  The opinion examines many of the due process problems with allowing proof of liability through statistical sampling, the most significant of which is that it tends to deprive a defendant of presenting evidence in its defense that it would be able to present in an individual case.  It also provides an additional illustration of what the Supreme Court considered an improper “trial by formula” in Dukes.