Opinion ID: 779426
Heading Depth: 2
Heading Rank: 2

Heading: The Predominance Requirement and Oral Misrepresentations

Text: 14 In order to qualify for class certification under Fed.R.Civ.P. 23(b)(3), plaintiffs in the proposed class must first demonstrate that they satisfy the four requirements of Fed.R.Civ.P. 23(a): (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. If these criteria are met, the court must decide whether questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and whether a class action is superior to other available methods for the fair and efficient adjudication of the controversy. Fed.R.Civ.P. 23(b)(3). 15 The Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation. Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 623, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). It is a more demanding criterion than the commonality inquiry under Rule 23(a). Id. at 623-24, 117 S.Ct. 2231. Class-wide issues predominate if resolution of some of the legal or factual questions that qualify each class member's case as a genuine controversy can be achieved through generalized proof, and if these particular issues are more substantial than the issues subject only to individualized proof. Visa Check, 280 F.3d at 136. 16 PaineWebber argues that fraud claims founded upon oral misrepresentations may not form the basis of a class action unless the misrepresentations are materially uniform in nature. On appeal, plaintiffs argue that liability for the allegedly fraudulent misrepresentations follows from a common course of conduct and, thus, class-wide issues predominate over individualized factual and legal issues. Plaintiffs also assert that the district court abused its discretion in finding that the misrepresentations were not sufficiently uniform to satisfy Rule 23(b)(3)'s predominance requirement. 17 As an initial matter, we must decide whether the district court applied the correct legal standard when it held that oral misrepresentations are not amenable to class certification unless they were materially uniform in nature. The Advisory Committee's Notes speak to this issue directly: 18 It is only where ... predominance exists that economies can be achieved by means of the class-action device. In this view, a fraud perpetrated on numerous persons by the use of similar misrepresentations may be an appealing situation for a class action, and it may remain so despite the need, if liability is found, for separate determination of the damages suffered by individuals within the class. On the other hand, although having some common core, a fraud case may be unsuited for treatment as a class action if there was material variation in the representations made or in the kinds or degrees of reliance by the persons to whom they were addressed. 19 Fed.R.Civ.P. 23(b)(3) advisory committee's note (1966 amendment). 20 Contrary to plaintiffs' argument, liability for fraudulent misrepresentations cannot be established simply by proof of a central, coordinated scheme. Rather, to recover for a defendant's fraudulent conduct, even if that fraud is the result of a common course of conduct, each plaintiff must prove that he or she personally received a material misrepresentation, and that his or her reliance on this misrepresentation was the proximate cause of his or her loss. Fraud actions must therefore be separated into two categories: fraud claims based on uniform misrepresentations made to all members of the class and fraud claims based on individualized misrepresentations. The former are appropriate subjects for class certification because the standardized misrepresentations may be established by generalized proof. Where there are material variations in the nature of the misrepresentations made to each member of the proposed class, however, class certification is improper because plaintiffs will need to submit proof of the statements made to each plaintiff, the nature of the varying material misrepresentations, and the reliance of each plaintiff upon those misrepresentations in order to sustain their claims. Grainger v. State Sec. Life Ins. Co., 547 F.2d 303, 307 (5th Cir.1977) ([T]he key concept in determining the propriety of class action treatment is the existence or nonexistence of material variations in the alleged misrepresentations.). As these are questions that more than likely will be the central disputed issues in a fraud action, certification of the class will not negate the need for a series of mini-trials where there are material variations in the nature of the misrepresentations made. 21 The question posed in the present case is whether the oral misrepresentations made to the individual plaintiffs fall within the first or the second category. The district court followed the lead of the Third, Fourth, Fifth, Sixth, and Seventh Circuits, which have held that oral misrepresentations are presumptively individualized. These circuits therefore treat class certification of fraud claims based upon oral misrepresentations as improper, absent a showing that the misrepresentations were made pursuant to a written, standardized sales script and that the sales agent participated in a common training program that emphasized uniformity in sales techniques. See, e.g., Broussard v. Meineke Disc. Muffler Shops, Inc., 155 F.3d 331, 341 (4th Cir.1998) (holding that fraud claims based substantially on oral rather than written communications are inappropriate for treatment as class actions unless the communications are shown to be standardized) (internal quotation marks omitted); Sprague v. Gen. Motors Corp., 133 F.3d 388, 399 (6th Cir.1998) (The district court took testimony from more than three hundred class members in an effort to obtain a purportedly representative sample of the representations and communications by GM. That it was necessary to do so strongly suggests to us that class-wide relief was improper.); Marcial v. Coronet Ins. Co., 880 F.2d 954, 957-58 (7th Cir.1989) (holding that issues specific to each plaintiff predominated because the major issue in contention — whether the insurance company had fraudulently informed the plaintiffs that they could only recover under an insurance policy if they submitted to a polygraph test — depended upon evidence of the individual oral communications between the defendant and each plaintiff); Grainger, 547 F.2d at 307-08 (It is possible, although unlikely, that oral misrepresentations can be uniform, e.g., through use of a standardized sales pitch by all the company's salesmen.... If plaintiffs cannot [demonstrate uniformity], then the district court may quite properly refuse to certify a class on the grounds that common questions of law or fact do not predominate.); see also Cohn v. Mass. Mut. Life Ins. Co., 189 F.R.D. 209, 215 (D.Conn. 1999) (noting that it is common sense that sales presentations will vary in material respects, depending upon the nature of the questions asked by the purchaser, the purchaser's relationship with the salesperson, and the salesperson's perception of the purchaser's needs, objectives, and financial sophistication); Rothwell v. Chubb Life Ins. Co., 191 F.R.D. 25, 30 (D.N.H. 1998) ([M]ost courts hold that certification is not appropriate when the plaintiffs' claims are based on oral representations, which, by their nature, tend to be particularized. Only when the variations in the representations are immaterial and, thus, the representations are essentially uniform, do courts generally consider certifying such classes.) (citations omitted). 22 The Third Circuit has considered this issue in the greatest depth. In In re Prudential Insurance Co. of America Sale Practices Litigation, the Third Circuit reviewed a district court's certification of a class of Prudential policyholders. 148 F.3d 283 (3d Cir.1998). The complaint alleged that Prudential engaged in a systematic fraudulent marketing scheme, which it implemented through the use of false and misleading sales presentations, policy illustrations, marketing materials, and other information approved, prepared, and disseminated by Prudential to its nationwide sales force. See In re Prudential Ins. Co. Of America Sales Practices Litig., 962 F.Supp. 450, 474 (D.N.J.1997). The sales force was not permitted to use any marketing material that had not been centrally approved. Id. at 473-75, 514. Moreover, the district court found that, because Prudential had given its agents extensive training, the agents' oral sales presentations were uniform. Id. at 514-15. Given these findings, the district court certified the class because Prudential had engaged in a common course of conduct with materially uniform misrepresentations to the plaintiff class. Id. at 511. The Third Circuit approved the certification of the class as within the district court's discretion. Prudential, 148 F.3d at 290. 23 In a subsequent case, the Third Circuit clarified that the Prudential holding rested upon the district court's finding of uniformity in the oral sales presentations. See In re LifeUSA Holding Inc., 242 F.3d 136 (3d Cir.2001). The district court in LifeUSA had relied on Prudential to hold that the defendant's fraudulent scheme provided the basis for each claim and that the predominance requirement had therefore been met. Id. at 146. The Third Circuit distinguished Prudential on the grounds that Prudential involved uniform, scripted, and standardized sales presentations that were virtually identical in all material respects, while the claims in LifeUSA arose from individual misrepresentations, neither uniform nor scripted, made by some 30,000 independent agents to over 280,000 purchasers. Id. (emphasis omitted). Given these and other factual differences, the Third Circuit held that, the predominance requirement had not been met and commonality of claims did not exist. Id. at 147. 24 In Johnston v. HBO Film Management, the Third Circuit again addressed this issue in the context of a RICO class action suit. 265 F.3d 178 (3d Cir.2001). The Johnston plaintiffs brought a RICO action, alleging that the defendant had induced them to make investments based upon fraudulent uniform oral and written misrepresentations. Id. at 186. Examining the record below, the Third Circuit concluded that there was no evidence of uniformity in the sales presentations. Id. at 189-90. Finding that two of the four elements necessary to establish the predicate act of securities fraud — misstatements and reliance — were subject to individualized proof, the Third Circuit concluded that the case was not amenable to class certification. Id. at 190. 25 We agree with these courts that a common course of conduct is not enough to show predominance, because a common course of conduct is not sufficient to establish liability of the defendant to any particular plaintiff. See id; LifeUSA Holding, 242 F.3d at 147; see also Broussard, 155 F.3d at 341; Sprague, 133 F.3d at 398; Marcial, 880 F.2d at 957. In order to establish PaineWebber's liability, each plaintiff must prove that he or she personally received a material misrepresentation, and that his or her reliance on this misrepresentation was the proximate cause of his or her loss. But a common course of conduct does not demonstrate that any specific statements made pursuant to that scheme were actionable. See Johnston, 265 F.3d at 185-86. In contrast, evidence of materially uniform misrepresentations is sufficient to demonstrate the nature of the misrepresentation; an individual plaintiff's receipt of and reliance upon the misrepresentation may then be simpler matters to determine. See Prudential, 148 F.3d at 315. 26 We disagree with these courts, however, insofar as they require specific forms of proof, for example, uniform written scripts for any oral communications and uniform training of sales agents. See, e.g., In re LifeUSA Holding Inc., 242 F.3d at 146-47. While training and the existence of scripts are relevant factors, the inquiry should remain focused on whether material variations in the misrepresentations existed. No particular form of evidentiary proof is mandated. The absence of uniform written sales scripts and training informs the determination whether material variations existed; it does not mandate a particular result. Thus, the fact that sales agents submitted affidavits that they did not participate in training programs or follow scripts, even if uncontroverted, is insufficient to demonstrate by itself that the misrepresentations themselves were not materially uniform. 27 Even though we believe that material uniformity in the misrepresentations may be established without the use of a standardized sales script, in the present case the district court did not abuse its discretion in denying the motion for class certification. Plaintiffs provided substantial evidence of a centralized sales scheme. For example, PaineWebber prepared marketing materials centrally and trained its brokers to emphasize the Provider's investment features. Several scripts provided evidence that PaineWebber sought to sell the Provider by downplaying the fact that the Provider was, simply, life insurance. But this evidence does not answer the relevant question — whether members of the class received materially uniform misrepresentations. Only if class members received materially uniform misrepresentations can generalized proof be used to establish any element of the fraud. The common scheme presented here does not demonstrate that the individual misrepresentations made were uniform; therefore, standing alone, the scheme does not provide a sufficient basis to justify class certification. 28 Despite plaintiffs' contention, therefore, none of this evidence contradicts the district court's sole finding, that PaineWebber's brokers did not adopt a materially uniform approach in their individual sales presentations. Even the evidence presented by plaintiffs shows that there were, in fact, material variations in the sales pitches used by their brokers. Plaintiffs submitted several customer complaints that describe the various misrepresentations made by PaineWebber's brokers. One customer complaint states that the broker misrepresented the Provider as a retirement program with insurance benefits; another states that the broker represented that the Provider was an IRA; a third specifically states that the broker never mentioned that the Provider was a life insurance product. Similarly, the telephone scripts upon which plaintiffs rely vary significantly. One states that the Provider features a life insurance policy; another makes no mention of life insurance at all; a third discloses that the Provider is a life insurance policy. Plaintiffs' evidence demonstrates that PaineWebber's disclosures regarding the Provider's insurance nature varied dramatically. The district court's finding that PaineWebber's brokers did not conduct materially uniform sales presentations was amply supported by the evidence before the court.