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Posts Tagged ‘fraud’

The United States Supreme Court heard oral argument today in the case of Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  A transcript of the argument is now available on the Court’s website. 

Erica P. John Fund involves the appropriate standard for assessing class certification in securities fraud cases brought under the “fraud on the market theory.”  Much of the argument was focused on whether the lower courts properly applied existing precedent in determining whether common issues predominated and whether the district court improperly considered the merits of the plaintiffs’ claim by requiring proof of loss causation at the class certification stage.  Many of these issues are unique to the securities fraud context.  The “fraud on the market” theory has been rejected in other contexts.  (See, e.g. CAB entry dated April 27, 2009.)  However, one seemingly off-the-wall hypothetical from Justice Breyer helps to illustrate what creates a common rather than an individualized question when evaluating either a securities fraud claim or another other fraud, misrepresentation, or nondisclosure claim: 

JUSTICE BREYER: Does your rule apply in all fraud cases? That is, a thousand farmers say, Mr. Jackson was our common buying agent, and the defendant lied to Mr. Jackson, and he relied on the lie.  It is a common issue whether he relied on the lie or he didn’t rely on the lie. I can understand somebody saying at the certification stage they have to see whether he’s really a common agent. But let’s imagine that’s assumed. The only question left is, did he rely or not rely?

Is that a question for the merits or is that a question for the common — for the —

MR. STERLING: Basic is really an exception that applies only –

JUSTICE BREYER: So you’re saying in the case that I just gave you reliance is for the merits?

MR. STERLING: Correct, Your Honor.

JUSTICE BREYER: Whether he really relied or didn’t rely, the common agent is for the merits?

MR. STERLING: But you couldn’t have

JUSTICE BREYER: Is that — is that your answer is?

MR. STERLING: No, Your Honor. You couldn’t have a case in that situation because reliance is an individual issue.

JUSTICE BREYER: No. A thousand people say Mr. Jackson is our common buying agent, and the defendant lied to this common buying agent, and he represented us. Relied on that. I’m asking if you that issue of reliance in an appropriate case is for the certification stage?

MR. STERLING: Yes, Your Honor, because

JUSTICE BREYER: Yes.

MR. STERLING: — you still have everybody having to say Mr. Jackson is my agent. That’s

JUSTICE BREYER: And they also have to prove there is a lie?

MR. STERLING: Right. And that’s a — but the individualized question of reliance is simply, is Mr. Jackson your agent or not? Because of that there is no common issue that — that predominates on reliance.

JUSTICE BREYER: Okay.

Slip op. at 44-45.

Setting aside the possibility of an individual question relating to the agency relationship, Justice Breyer’s hypothetical gets to the heart of what could make a fraud claim susceptible to class treatment.  First, although fraud requires reliance, in many contexts, it does not usually require reliance by the plaintiff.  In Justice Breyer’s hypothetical, a single party meets the reliance requirement for the entire class.  In other words, a false statement was made, and there was reliance because Mr. Jackson believed and acted upon it.  There could also be common causation of injury if, due to his reliance on the lie, Mr. Jackson paid $1 per thousand seed when he could have paid $.99 for seed with the same attributes somewhere else. 

The agency issue could very well be an individual issue, as Mr. Sterling surmised, but there really aren’t enough facts in the hypothetical to know this for sure.  For example, there could be a single document that all of the farmers signed, to which there is no dispute about authenticity, and which designates Mr. Jackson as the agent for all.  (Nor does Mr. Sterling’s answer probably help the defendant in a securities fraud case, since the “Mr. Jackson” in a “fraud on the market” claim is the market itself.  If it is an efficient market, so the theory goes, it sets the price that everyone pays regardless of their individual assent.)

The problem with the hypothetical, therefore, is not that it fails to describe the type of fraud claim that might be appropriate for class treatment but instead that it does not describe most real-life fraud cases that are brought as class actions.

In most fraud claims, however, neither the question of reliance nor the question of loss causation is a common question.  In most cases, the reliance that would have to be proved for any class member to prevail would be the class member’s own reliance.  Unless the case involves a situation in which no reasonable person would take any action other than the one that the plaintiff claims could have been taken for class members to avoid injury, reliance is probably not a common question.  Moreover, the existence of a common injury is not necessarily a common question in most cases because the existence of some better alternative often can only be evaluated on a case-by-case basis.  

For example, take away the common agent and change the hypothetical as follows, and the common issues go away: A seed salesman sells corn seed to 1000 farmers for $1 per thousand, and falsely claims, uniformly to each of the farmers, that the seeds grow ears of white-colored corn, but truthfully claims that the corn will be drought-tolerant and delicious.  In fact, they the seeds grow ears of slightly yellowish corn.  

Though the fraudulent statement was uniform, the lack of a common agent to rely on it injects problems with reliance and causation that should prevent this claim from being tried (fairly anyway) on a class-wide basis.  Proof of reliance will require that the color of the corn was an important attribute to each farmer, and that he would not have purchased the seeds if they had been advertised as being off-white.  Many farmers may not care what color the corn is, as long as it is drought-tolerant and delicious, and the only way to resolve the reliance question for sure is to adjudicate each farmer’s claim individually.  Proof of causation will require, in addition, that a given farmer had an alternative source of white corn available.  If not, and the farmer would have been compelled to buy the supplier’s seeds regardless of the color, then the false statement, even it if was relied upon, caused no injury.  Note that even in the hypothetical that includes a common agent, causation of injury may not be common because there may be farmers on whose behalf the agent would have been forced to buy the supplier’s seeds regardless of the false statement about color.  These same issues come up any time there was not one obvious course of action and palatable alternative that all members of a would-be class would take if the true facts had been revealed.

So, Justice Bryer’s hypothetical may illustrate the type of fraud claim that would be appropriate for a class action, the unique facts in the example can also serve to illustrate why many fraud claims should not be certified as class actions.

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Two colleagues separately sent me a copy of the Seventh Circuit Court of Appeals’ decision yesterday in Greenberger v. GEICO General Insurance Co., slip op., No. 09-1603 (7th Cir., Jan. 10, 2011) (Sykes, J.), so I thought it was worthy of a summary. 

Greenberger involved would-be class action claims against an insurer for the alleged practice of not paying to have vehicles restored to their pre-loss condition, as required under its policies.  The district court had granted the defendant’s motion for summary judgment before reaching a decision on class certification.  The Seventh Circuit affirmed.  The panel’s decision ostensibly rests on the holdings of earlier cases and doesn’t pretend to make new law.  However, the number of different issues addressed may make the case a common citation in future class certification response briefs, especially in insurance class actions in Illinois and the Seventh Circuit, but potentially elsewhere as well.  The holdings included:

  • Jurisdiction under the Class Action Fairness Act of 2005 (“CAFA”) attaches to a class action complaint even if a class is never certified.  Slip op. at 5-6 (relying on Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 806 (7th Cir. 2010)).
  • An insured cannot succeed on a breach of contract claim against his insurer for allegedly failing to bring a vehicle to a pre-loss condition if the vehicle is not available to be examined, because the insured cannot prove either a breach of the contract (by showing that the vehicle was not repaired to its pre-loss condition) or damages (by establishing the difference in value between the vehicle as repaired and the vehicle in its pre-loss condition).  Slip op. at 6-11 (relying on Avery v. State Farm Mutual Automobile Insurance Co., 835 N.E.2d 801 (Ill. 2005)).
  • A plaintiff cannot prevail on a consumer fraud or common law fraud claim if the fraud claim is based on the same predicate facts as a claim for breach of contract.  Slip op. at 11-16 (also relying on Avery).
  • In Illinois, no fiduciary duty exists between insurer and insured as a matter of law, unless the plaintiff can prove by clear and convincing evidence that special circumstances existed such that the insured placed trust or confidence in the insurer.  Slip op. at 16-17 (citing Fichtel v. Bd. of Dirs. of River Shore of Naperville Condo. Ass’n, 907 N.E.2d 903 (Ill. App. Ct. 2009); Martin v. State Farm Mut. Ins. Co., 808 N.E.2d 47 (Ill. App. Ct. 2004)).

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