Source: https://www.gibsondunn.com/third-quarter-2016-update-on-class-actions/
Timestamp: 2019-04-20 10:17:11+00:00

Document:
For several years, Gibson Dunn has been reporting significant legal developments involving class actions on an annual basis, most recently in our 2015 Year-End Update on Class Actions. We are pleased to announce that, in addition to our annual year-end updates, we will now be providing quarterly updates of significant appellate class action decisions and trends.
This update provides an overview and summary of key class action developments during the third quarter of 2016. Part I addresses recent decisions from the Third, Fifth, and Ninth Circuits regarding the impact of damages issues on Rule 23(b)(3)’s predominance requirement. Next, Part II discusses important class settlement decisions from the Second, Sixth, and Seventh Circuits. Finally, Part III discusses a new circuit conflict over whether the National Labor Relations Act invalidates class action waivers in mandatory employment arbitration agreements.
The federal courts of appeals continue to grapple with the relevance of damages issues in assessing whether Rule 23(b)(3)’s predominance requirement is satisfied. As we noted in our 2014 Year-End Update on Class Actions, despite the Supreme Court’s holding in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), that class certification is improper under Rule 23(b)(3) where "[q]uestions of individual damage calculations will inevitably overwhelm questions common to the class," id. at 1433, courts have interpreted this aspect of Comcast in divergent ways. Opinions issued this quarter by the Third, Fifth, and Ninth Circuits illustrate the continuing divide and confusion over damages issues and the predominance requirement.
Third Circuit Requires Classwide Proof of the "Fact of Damage"
In Harnish v. Widener University School of Law, 833 F.3d 298 (3d Cir. 2016), the Third Circuit affirmed a district court’s denial of class certification under Rule 23(b)(3) because of the plaintiffs’ inability to demonstrate "the fact of damage" on a classwide basis. Id. at 305–06. The plaintiffs in Harnish were graduates of Widener University School of Law who alleged that the school had published misleading statistics about its alumni’s employment prospects. Id. at 302. In affirming the denial of certification, the Third Circuit agreed that plaintiffs had failed to demonstrate that the "fact of damage"–that is, whether class members had "suffered some harm traceable to the defendant’s conduct"–could be proven on a classwide basis. Id. at 305–06 (emphasis in original). The Third Circuit emphasized that the "fact of damage" was distinct from the "measure/amount of damages," and is "often synonymous with ‘injury’ or ‘impact.’" Id.
Similar to the Third Circuit’s decision in Harnish, the Fifth Circuit in Crutchfield v. Sewerage & Water Board of New Orleans, 829 F.3d 370 (5th Cir. 2016), affirmed the denial of class certification under Rule 23(b)(3) based, in part, on the predominance of individualized damages issues. Crutchfield involved a putative class of property owners residing near a canal construction project–they alleged that various construction activities had damaged their property and caused them mental anguish and emotional distress. Id. at 374. The Fifth Circuit held that the "district court did not abuse its discretion in concluding that individualized issues of causation and damages would predominate." Id. at 379. The Fifth Circuit specifically noted that any damages assessment "would at a minimum need to take account of the variances in age, size, type, construction, condition, soil composition, and location of the properties." Id. at 377. And with respect to any damages for emotional distress, that "would presumably require testimony from each affected class member." Id. at 377–78. Although the Fifth Circuit observed that "trial courts have flexibility in crafting bifurcated proceedings once a case is certified, the predominance inquiry that is a prerequisite to certification requires assessing all the issues in a case–including damages–and deciding whether the common ones will be more central than the individual ones." Id. at 378.
Underlying both Harnish and Crutchfield is the important recognition that damages issues are relevant to the predominance calculus, and should not simply be ignored by district courts in considering whether Rule 23(b)(3) is satisfied.
By contrast, two recent Ninth Circuit decisions have expressly minimized the relevance of damages issues to the certification of Rule 23(b)(3) classes. First, in Vacquero v. Ashley Furniture Industries, Inc., 824 F.3d 1150 (9th Cir. 2016), the Ninth Circuit reiterated its position that, even after Comcast, "the need for individual damages calculations does not, alone, defeat class certification" under Rule 23(b)(3). Id. at 1155. Recall that in Comcast, the Supreme Court held that "[q]uestions of individual damage calculations" may "overwhelm questions common to the class" and prevent a finding of predominance. 133 S. Ct. at 1433. According to the Ninth Circuit, however, Comcast instead held only that "[i]f the plaintiffs cannot prove that damages resulted from the defendant’s conduct, then the plaintiffs cannot establish predominance." Vacquero, 824 F.3d at 1154.
Then, in Torres v. Mercer Canyons Inc., No. 15-35615, — F.3d —, 2016 WL 4537378 (9th Cir. Aug. 31, 2016), the Ninth Circuit acknowledged that "[i]n wage-and-hour disputes . . . individualized damages inquiries are common," but held that such individualized issues "typically do not defeat certification." Id. at *11. But see Doyle v. Chrysler Group, LLC, No. 15-55107, – F. App’x –, 2016 WL 6156062 (9th Cir. Oct. 24, 2016) (unpublished) (decertifying class where plaintiff’s "partial reimbursement approach" to calculating damages could not "be measured on a classwide basis").
As these decisions show, the federal courts of appeals continue to provide conflicting guidance to lower courts regarding the relevance of damages issues to the Rule 23(b)(3) class certification inquiry.
Our year-end updates in 2013 and 2015 emphasized that the federal courts of appeals have closely scrutinized the fairness of class action settlements in recent years. The trend continues, as decisions this quarter from the Second, Sixth, and Seventh Circuits demonstrate.
The Second Circuit in In re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation, 827 F.3d 223 (2d Cir. 2016), vacated a district court’s approval of a $7.25 billion class settlement agreement after finding that representation by the same counsel of two distinct settlement classes was inadequate. The case involved antitrust claims brought on behalf of more than 12 million merchants against Visa, MasterCard, and various banks, alleging a conspiracy to artificially inflate credit card fees charged to merchants in violation of Section 1 of the Sherman Act. Id. at 227–28. Under the parties’ settlement, a class of merchants who had accepted Visa or MasterCard from 2004 to 2010 would receive up to $7.25 billion in cash, and a class of merchants who accepted (or will accept) Visa or MasterCard from 2012 onwards would receive only injunctive relief. Id. at 229.
In reversing the district court’s approval of the settlement, the Second Circuit held that the injunction-only class was inadequately represented in violation of Rule 23(a)(4) and due process–the "conflict is clear between merchants of the (b)(3) class, which [we]re pursuing solely monetary relief, and merchants in the (b)(2) class, defined as those seeking only injunctive relief." Id. at 233. Although the Second Circuit declined to adopt a per se rule prohibiting unitary representation of classes seeking different forms of relief, the court noted that "[p]roblems arise when the (b)(2) and (b)(3) classes do not have independent counsel, seek distinct relief, have non-overlapping membership, and (importantly) are certified as settlement-only." Id. at 235. The Second Circuit also held that its inadequacy ruling was "confirmed by the substance of the deal that was struck," which the court found "so unreasonable that it evidences inadequate representation." Id. at 236.
The Seventh Circuit also weighed in on class settlements this past quarter in the context of now-ubiquitous shareholder class actions challenging sizeable M&A transactions. In an opinion authored by Judge Richard Posner, the court rejected a proposed settlement of a lawsuit brought on the heels of Walgreens’ acquisition of Alliance Boots, in which Walgreens agreed to make certain additional disclosures to its shareholders and pay $370,000 to plaintiffs’ counsel. In re Walgreen Co. Stockholder Litig., 832 F.3d 718, 721–22 (7th Cir. 2016).
Judge Posner’s opinion began with a strong critique of the growing trend "in which a large public company announces an agreement that requires shareholder approval to acquire another large company, and a suit, often a class action, is filed on behalf of shareholders of one of the companies for the sole purpose of obtaining fees for the plaintiffs’ counsel." Id. at 721. The Seventh Circuit then expressly endorsed the approach of the Delaware Chancery Court, in which "disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission." Id. at 725 (quoting In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) (emphasis added)). Applying this framework, the Seventh Circuit found it "inconceivable that the six disclosures added by the settlement agreement either reduced support for the merger by frightening the shareholders or increased that support by giving the shareholders a sense that now they knew everything." In re Walgreen Co., 832 F.3d at 732. Thus, the "$370,000 paid class counsel … bought nothing of value for the shareholders, though it spared the new company having to defend itself against a meritless suit to void the shareholder vote." Id.
The opinion in In re Walgreen Co. included a strong warning to plaintiffs’ counsel who file these sorts of "strike suits": "The type of class action illustrated by this case–the class action that yields fees for class counsel and nothing for the class–is no better than a racket. It must end. No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand." Id. at 724; see also id. at 726 ("class counsel, if one may judge from their performance in this litigation, can’t be trusted to represent the interests of the class").
Finally, in a pair of decisions, the Sixth Circuit provided important guidance for courts and litigants on several recurring class settlement issues.
Claims-Made Settlements, Clear Sailing Agreements. In Gashco v. Global Fitness Holdings, LLC, 822 F.3d 269 (6th Cir. 2016), plaintiffs brought a putative class action alleging the operator of fitness facilities incorrectly charged fees associated with gym memberships. Id. at 273. The parties’ settlement made $15.5 million available in refunds to class members, who could obtain the funds through a claims process. Id. at 277. Although only approximately $1.6 million in funds were ultimately claimed and distributed (with the remainder reverting to the defendant), a divided panel of the Sixth Circuit upheld the fairness of the claims process, noting that "the 8 percent response rate was well within the acceptable range for a consumer class action." Id. at 290. The court also held that a $2.39 million fee award was appropriate even though it exceeded the amount actually distributed to class members, id. at 276–88, and that a "clear sailing" agreement (in which the defendant agreed not to challenge the fee award up to a certain amount) was not a sufficient basis to reject the settlement, id. at 290–91.
Sufficient Opportunity for Absent Class Members to Object. Second, in Shane Group, Inc. v. Blue Cross Blue Shield of Michigan, 825 F.3d 299 (6th Cir. 2016), the Sixth Circuit vacated certification of a settlement class in a price-fixing action because the absent class members did not have a sufficient opportunity to participate in evaluating the settlement. Specifically, according to the Sixth Circuit, the district court improperly sealed portions of the record, failed to critically analyze Rule 23(e)’s reasonableness factors, and erred in approving the fee request by relying too heavily the claimed amounts without backup support. The Sixth Circuit remanded "for an open and vigorous examination of the settlement’s fairness to the class," emphasizing that "[c]lass members cannot participate meaningfully in the process contemplated by [Rule] 23(e) unless they can review the bases of the proposed settlement and the other documents in the court record." 825 F.3d at 302, 309.
These recent decisions confirm that appellate scrutiny of class settlements is anything but a formality, and that plaintiffs and defendants alike must pay careful attention to whether the provisions of a settlement will pass muster both before district courts and on appeal.
Until recently, state and federal appellate courts had consistently rejected arguments by plaintiffs’ lawyers that the National Labor Relations Act (29 U.S.C. § 151, et seq. ("NLRA")) precludes class action waivers in mandatory employment arbitration agreements. For example, the Fifth Circuit in D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013), overturned a decision of the National Labor Relations Board ("NLRB") finding that an employer had violated the NLRA by requiring its employees to sign an arbitration agreement containing a class action waiver. In the Fifth Circuit’s view, the "effect" of the NLRB’s interpretation of the NLRA was "to disfavor arbitration" in violation of the Federal Arbitration Act ("FAA") and the Supreme Court’s precedents upholding arbitration. Id. at 359. The Second and Eighth Circuits, as well as the California and Nevada Supreme Courts, have come to the same conclusion. See Cellular Sales of Mo., LLC v. NLRB, 824 F.3d 772, 776 (8th Cir. 2016); Sutherland v. Ernst & Young LLP, 726 F.3d 290, 297 n.8 (2d Cir. 2013) (per curiam); Tallman v. Eighth Jud. Dist. Ct., 359 P.3d 113, 122–23 (Nev. 2015); Iskanian v. CLS Transp. L.A., LLC, 327 P.3d 129, 137–43 (Cal. 2014).
This quarter, the Seventh and Ninth Circuits upset this consensus, although the full impact of these decisions remains to be seen.
The Seventh Circuit in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), affirmed a district court’s denial of a motion to compel arbitration on the ground that the arbitration provision violated the NLRA. The court held that the NLRA’s section protecting the right of employees "to engage in other concerted activities," 28 U.S.C. § 157, "should be read broadly to include resort to representative, joint, collective, or class legal remedies." 823 F.3d at 1153. And unlike the Fifth Circuit in D.R. Horton, the Seventh Circuit held that the FAA did not require enforcement of the arbitration agreement because the NLRA fell within the savings clause of Section 2 of the FAA, which allows for challenges to arbitration agreements on "grounds as exist at law or in equity for the revocation of any contract." Id. at 1156–57. Thus, in the Seventh Circuit’s view, there was "no conflict between the NLRA and the FAA." Id. at 1157.
Just weeks later, a divided panel of the Ninth Circuit deepened the split created by Lewis when it vacated an order compelling individual arbitration in Morris v. Ernst & Young, LLP, No. 13-16599, — F.3d —, 2016 WL 4433080 (9th Cir. Aug. 22, 2016). In Morris, the Ninth Circuit agreed with the Seventh Circuit’s reasoning in Lewis that requiring arbitration in "separate proceedings" was unenforceable because it "interfered" with the employees’ right to engage in concerted activity under the NLRA. Id. at *2–*5. The Ninth Circuit further held that the FAA did not mandate enforcement of the arbitration agreement because the "separate proceedings" provision was a waiver of a "substantive federal right," and "[t]he FAA does not mandate the enforcement of contract terms that waive substantive federal rights." In dissent, Judge Ikuta characterized the majority opinion in Morris as "breathtaking in its scope and in its error," and as placing the Ninth Circuit on the "wrong side of a circuit split." Id. at *11 (Ikuta, J., dissenting).
The Ninth Circuit’s ruling conflicts with the California Supreme Court’s opinion in Iskanian, which agreed with the Fifth Circuit that decisions of the United States Supreme Court foreclose the argument that "neither the NLRA’s text nor its legislative history contains a congressional command prohibiting [class action] waivers." 327 P.3d at 372–73 (citing AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1753 (2011), and Am. Express Co. v. Italian Colors Restr., 133 S. Ct. 2304, 2312 & fn. 5 (2013)). This split is the inverse of a previous decision involving classwide arbitration, where the state appellate court refused to enforce a class waiver in DirecTV’s terms of service, and the Ninth Circuit had enforced it. See DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463, 471 (2015) (reversing California Court of Appeal’s judgment and upholding class action waiver in arbitration agreement under Concepcion).
It should be noted that the recent rulings from the Seventh and Ninth Circuits do not give employees a right to class arbitration. Thus, if a district court in one of these circuits refuses to enforce a class waiver, the next question would be whether the parties agreed to submit to classwide arbitration. Under existing Supreme Court precedent, a party not be "compelled … to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so." Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684 (2010); see also id. at 689 (holding that absence of a class waiver is not evidence that "the parties agreed to authorize class arbitration"); AlixPartners, LLP v. Brewington, No. 16-1027, — F.3d —, 2016 WL 4578358, at *7 (6th Cir. Sept. 2, 2016) ("An agreement must expressly include the possibility of classwide arbitration for us to conclude that the parties agreed to it. This arbitration clause is silent on the availability of classwide arbitration, and we may not presume from ‘mere silence’ that the parties consented to it."). Moreover, the Ninth Circuit has held that the ability to opt out of an arbitration agreement with a class action waiver precludes any violation of the NLRA. See Johnmohammadi v. Bloomingdale’s, Inc., 755 F.3d 1072, 1075 (9th Cir. 2014).
All sides of this debate have petitioned for a writ of certiorari–the plaintiffs in Patterson v. Raymours Furniture Co. (from the Second Circuit), the defendants in both Lewis and Morris, and the NLRB in Murphy Oil USA, Inc. v. NLRB (from the Fifth Circuit). Given the clear split in authority, this is an ideal candidate for U.S. Supreme Court review, potentially as soon as the current Term.
The following Gibson Dunn lawyers prepared this client update: Kahn A. Scolnick, Bradley J. Hamburger, Christopher Chorba, Theane Evangelis, Jason C. McKenney, Gregory S. Bok, Charles W. Proctor, and Cynthia Schmidt.

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