Back to the drawing board: AT&T's arbitration agreement that bans class actions is still unconscionable

It seems to me that the telecommunications and credit card industries are more determined to make an arbitration agreement with a class action ban stick than any other industry.  Most employers have given up that dream, but not the phone company and not the bank.  The latest arbitration agreement with a class action ban comes to us compliments of AT&T Mobility LLC.  But, in Laster v. AT&T Mobility LLC (October 27, 2009), the Ninth Circuit sends another class action ban to the unconscionability graveyard, and just in time for Halloween.

Those crazy mad scientists in the secret AT&T Arbitration Agreement Drafting Lab (also known as the "Triple A - DL" to those in the know), their latest scheme to ban class actions was ingenious, and could have helped them take over the world!  The plan was to circumvent the holding of Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007) with a little bonus payment clause:

[T]he phone company points to a new wrinkle: unlike the arbitration clause in Shroyer, this arbitration clause provides for a “premium” payment of $7,500 (the jurisdictional limit of California’s small claims court) if the arbitrator awards the customer an amount greater than the phone company’s last written settlement offer made before selection of an arbitrator. Hence, says the phone company, the arbitration clause is not an artifice that has the practical effect of rendering it immune from individual claims.

Slip op., at 14391.  The Ninth Circuit disagreed, and shot down a preemption argument along the way:

We will find, on second blush, the new “premium” payment does not distinguish this case from Shroyer, and that under California law, the present arbitration clause is unconscionable and unenforcable [sic]. Further, we will also find no merit to the phone company’s claim the Federal Arbitration Act (FAA) preempts California unconscionability law.

Slip op., at 14391.  Back to the Triple A - DL, Snidely.  For those not satisfied with just the holding, the Court's analysis relied heavily on Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005):

The California Supreme Court addressed the unconscionability of class action waivers in arbitration agreements for the first time in Discover Bank v. Sup. Ct., 113 P.3d 1100 (Cal. 2005), holding that class action waivers were at least sometimes unconscionable under California law. 113 P.3d at 1108. Class actions, the court reasoned, serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money. Id. at 1105. Class action waivers pose a problem because, “small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.” Id. at 1106. In this way, the class action waiver allows the company to insulate itself from liability for its wrongdoing and the policy behind class actions is thwarted. Id. at 1109.

Slip op., at 14394.  The Court then explained how it interpreted the test in Discover Bank:

We have interpreted Discover Bank as creating a three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) is the agreement a contract of adhesion; (2) are disputes between the contracting parties likely to involve small amounts of damages; and (3) is it alleged that the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money. Id. at 983. In Shroyer, we noted that “there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied.” Id. Because we hold that the class action waiver at issue satisfies all three parts of the test, as was true in Shroyer, “it is unnecessary to explore those circumstances here.” Id.

Slip op., at 14395.  The application of the Discover Bank test tracks Shroyer.  The Court then disposed of AT&T's contention that the promise of a premium payment distinguished this agreement from Shroyer:

The $7,500 premium payment is available only if AT&T does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected. This means that if a customer files for arbitration against AT&T, predictably, AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22. We held in Shroyer that a claim worth a few hundred dollars did not provide adequate incentive for a customer to bother pursuing individual arbitration. 498 F.3d at 986. The $30.22 at issue here is even less of an incentive to file a claim. As a result, aggrieved customers will predictably not file claims—even if the odds are that after the letter-writing and arbitrator-choosing, they will get a $30.22 offer—thereby “greatly reduc[ing] the aggregate liability” AT&T faces for allegedly mulcting small sums of money from many consumers. See id. The premium payment provision has no effect on this conclusion, nor do any of the other provisions of AT&T’s revised arbitration clause. The actual damages a customer will recover remain predictably small, thus under the rationale of Discover Bank and Shroyer, AT&T’s class action waiver is in effect an exculpatory clause, hence substantively unconscionable.

Slip op., at 14397-98.  I'll spare you any excerpts from the preemption discussion.  It's sufficient to say that the Court was impressed with a repeat of arguments rejected in Shroyer.

In re Tobacco II Cases receives more attention in Kaldenbach v. Mutual of Omaha

In re Tobacco II Cases hasn't been out long, but its significance is already hard to deny.   Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) was the first published opinion by a California Court of Appeal to apply In re Tobacco II Cases.  See blog post.  In Kaldenbach v. Mutual of Omaha Life Insurance Company, et al. (October 26, 2009), the Court of Appeal (Fourth Appellate District, Division Three) had occasion to discuss In re Tobacco II Cases in the context of an appeal of the denial of class certification in a "vanishing premiums" action.

Before discussing the opinion, a definition is in order.  “Generally speaking, so called ‘[v]anishing premium policies are paid dividends which in some instances can be sufficient to cause the premium to “offset” whereby dividend values are used to pay the premium. In such an instance, the cash premium “vanishes” and is no longer due from the insured.’”  Keyes v. Guardian Life Ins. Co. of America, 194 F.R.D. 253, 254, n. 1 (S.D. Miss. 2000), quoting Phillips v. New England Mut. Life Ins. Co., 36 F.Supp.2d 345, 347 (S.D. Miss. 1998).)  In other words, the theory is that a larger sum is paid into a policy for a few years, and then the investment of those funds should generate a dividend that is sufficient to pay the premium thereafter.

Returning to the opinion, the Court of Appeal spent significant time discussing the facts of the case and the nature of "vanishing premium" policies before summarizing the Trial Court's Order denying class certifiation:

The trial court denied the motion for class certification. It concluded Kaldenbach had not demonstrated numerosity other than his assertion that over 4,000 policies were sold.  Kaldenbach had not shown ascertainability as there was no evidence as to how it could be shown which of the policyholders had received illustrations during the sales presentation.

The court concluded Kaldenbach had not shown typicality because Meyerson testified in his deposition that the sale to Kaldenbach was not typical as he had a clearly defined dominant need, Kaldenbach testified he never received any explanation from Meyerson about how the policy worked, how interest rates or costs of insurance were determined, what the extent of his obligation to pay annual premiums was, and what might happen if he stopped paying premiums. By contrast, Meyerson testified he fully explained the policy to Kaldenbach. “If [Kaldenbach] and Meyerson cannot even agree as to what was stated during the [sales] presentation to [Kaldenbach], how can [Kaldenbach's] claim be typical [and] be used to prove 4,000 claims? . . . It will take . . . individual evaluation of each claim to determine liability.”

The court also found Kaldenbach had not established commonality. Kaldenbach primarily relied upon uniformity in Mutual‟s sales materials, training, and illustrations, but there was no evidence linking those common tools to what was actually said or demonstrated in any individual sales transaction. The training materials and methods were not uniform throughout the class period. None of the allegedly scripted or memorized sales materials covered the alleged misrepresentations. And there was no evidence that uniform training or sales materials were used with each putative class member. There was no evidence all independent agents were required to take the offered training, took the offered training, had the same training, or used the same training or materials in their sales presentations. In fact “[t]here was evidence that the agents were free to ignore the training and written manuals.” Mutual‟s agents were independent contractors over whom Mutual had little or no control. Meyerson testified he did not follow his training or manuals in making the presentation to Kaldenbach. Kaldenbach had argued commonality could be found based solely on the use of illustrations, but Kaldenbach testified he never looked at the entire illustration, he only looked at the part of the illustration that showed the premium could vanish in four years because that was what Kaldenbach wanted.

The court also believed varying applicability of the statute of limitations and the delayed discovery rule to each putative class member‟s claim precluded class certification. The court noted the 70 percent lapse rate Kaldenbach alleged occurred with the policy at issue did not establish class-wide liability. There was no evidence it was an unusual lapse rate and no evidence as to why the policies had lapsed. For example, individual policyholders may have taken loans out against the cash accumulation, they may have decided to purchase a different product, or no longer needed the coverage. “[A]nalysis of why a policy lapsed is just one more issue that would need to be addressed on an individual and not class wide basis.”

Finally, the court listed the individualized issues that predominated and which could not be proven on a class-wide basis including: (1) did the agent take Mutual‟s training and read Mutual‟s manuals; (2) did the agent always use the training and materials; (3) what materials, disclosures, representations, and explanations were given to any given purchaser; (4) was an illustration used; (5) what information was input into the illustration; (6) did the purchaser rely on representations made in the sales presentation; (7) what were the customer‟s individual needs; (8) when did each class member‟s cause of action accrue; and (9) did the individual class member‟s policy lapse, and if so, why?

Slip op., at 11-13.   After describing the valuable benefits of class actions, and noting that the reasoning of the Trial Court is scrutinized when reviewing an order denying certification, the Court of Appeal observed:  "We may not reverse, however, simply because some of the court's reasoning was faulty, so long as any of the stated reasons are sufficient to justify the order. (Caro v. Procter & Gamble Co. (1993) 18 Cal.App.4th 644, 655-656 (Caro).)"  Slip op., at 14-15.

As the Court of Appeal turned to the merits, it began its discussion by cataloging a number of federal court decisions where class certification was denied on the same theory.  Parenthetically, the placement of this discussion suggests that the conclusions of those federal cases persuaded the Court of Appeal to affirm the Trial Court.

Eventually, the Court of Appeal turned to the promised discussion of In re Tobacco II Cases as it analyzed the denial of class certification for the UCL Cause of Action.  The language selected by the Court of Appeal for italicization clearly suggests the outcome:

A private person “may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements . . . and complies with [s]ection 382 of the Code of Civil Procedure.” (Bus. & Prof. Code, § 17203.) Recently, in In re Tobacco II Cases (2009) 46 Cal.4th 298, 3245, the Supreme Court held in the UCL class action context, the “injury in fact” standing requirement imposed by Proposition 64 applies only to the class representative and not to “absent class members in a UCL class action where class requirements have otherwise been found to exist.” (Italics added.) UCL relief is available on a class basis “without individualized proof of deception, reliance and injury. [Citations.]” (Id. at p. 320.)

Slip op., at 20.  The Plaintiff argued that the Trial Court incorrectly "premised its order denying class certification on the complexities of establishing each absent class members' reliance on the representations made and their injury."  Slip op., at 20.  The Court of Appeal wasn't concerned with this error:

There were myriad other individualized issues the court found to predominate including whether any given agent took Mutual's training, read its manuals, and routinely followed the training and materials; and what materials, disclosures, representations, and explanations were given to any given purchaser. These individualized issues go not to the injury suffered by a purchaser, but to whether there was in fact an unfair business practice by Mutual. Neither In re Tobacco II Cases, supra, 46 Cal.4th 298, nor Massachusetts Mutual, supra, 97 Cal.App.4th 1282, compel a different result.

Slip op., at 21.  The Court of Appeal went on to distinguish Kaldenbach's case from In re Tobacco II Cases and Massachusetts Mutual:

[B]oth In re Tobacco II Cases and Massachusetts Mutual involved identical misrepresentations and/or nondisclosures by the defendants made to the entire class. In re Tobacco II Cases targeted the tobacco industries' deceptive advertisements and statements disseminated to the public about the health effects of tobacco use. Massachusetts Mutual concerned the insurer's failure to disclose to policy purchasers and its agents its plan to decrease its discretionary dividend. In other words, there was no issue about defendants' uniform business practices giving rise to the UCL claim.

But here there is no such uniformity. Although Kaldenbach claimed Mutual's presentations relating to ALPs were uniform, it utilized standardized training methods, materials, and scripts to which agents were required to adhere, the evidence showed the opposite. Mutual's policies were sold by independent agents, and during the class period, they were not required to attend training or utilize any given sales materials. Agents were not required to adhere to a scripted sales presentation. Indeed Meyerson, who sold Kaldenbach his policy, testified at his deposition he did not use a scripted sales presentation or any training materials in making the sale to Kaldenbach.

Slip op., at 22.  If nothing else, analyses like this will encourage sales policies that state vague guidelines and some variation in sales approaches to eliminate uniformity of representations to consumers.  In any event, Kaldenbach's argument that he was entitled to an "inference of injury" for his fraud claim met with a similar fate, as the Court of Appeal noted that the inference is only available where the misrepresentations are uniform.

The Court of Appeal ignored the balance of the Trial Court's Order, concluding that the predominance of individualized issues was a sufficient ground for denying class certification.  A complicated set of facts coupled with a seemingly conservative Court of Appeal made this outcome all but a formality.

More coverage of the decision in Morgan v. AT&T Wireless Services, Inc.

As the first published California appellate court decision to apply Tobacco II, the Opinion in Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) (covered on this blog here) is receiving quite a bit of attention. On October 9, 2009, the Bureau of National Affairs, Inc. ("BNA") published an article entitled "Court Applies Tobacco II: Prop 64 Changed Standing Requirements, Not Substantive Law" in the Class Action Litigation Report. Kimberly Kralowec, partner at Schubert Jonckheer Kolbe & Kralowec and The UCL Practitioner, and I were both quoted in the article. The article is reproduced below with the gracious permission of BNA.

Reproduced with permission from Class Action Litigation Report, 10 CLASS 906 (Oct. 10, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com:

If flash is not available in your browser, the article can be accessed here.

More on Morgan, et al. v. AT&T Wireless Services, Inc.

As promised shortly after Morgan, et al. v. AT&T Wireless Services, Inc. (September 23, 2009) was published, here is a longer post on the first substantial application of In re Tobacco II Cases, 46 Cal. 4th 298 (2009) by a California Court of Appeal.  Before commenting on the analysis in Morgan, a brief summary of the facts of the case are in order.  The plaintiffs alleged that they were ripped off when they purchased the premium Sony Ericsson T68i cell phone for use on the AT&T network but weren't told that AT&T was abandoning the 1900 MHz GSM spectrum in favor of the 850 MHz spectrum, rendering the phones useless.  Then AT&T sent the T68i owners an inferior replacement that they called an "upgrade."  After three successive rounds of pleadings, the trial court held that plaintiffs could not state any actionable claims.  In case you were wondering, I just summarized 20 pages of opinion for you.

 First, the Court examined the UCL cause of action by recapitulating the elements of a valid UCL cause of action:

[D]espite the changes to the standing requirements, the Proposition 64 amendments to the UCL "'left entirely unchanged the substantive rules governing business and competitive conduct. Nothing a business might lawfully do before Proposition 64 is unlawful now, and nothing earlier forbidden is now permitted.'" (In re Tobacco II Cases (2009) 46 Cal.4th 298, 314 (Tobacco II).) Thus, pre-Proposition 64 caselaw that describes the kinds of conduct outlawed under the UCL is applicable to post-Proposition 64 cases such as the present case. The only difference is that, after Proposition 64, plaintiffs (but not absent class members in a class action) must establish that they meet the Proposition 64 standing requirements. (Tobacco II, supra, 46 Cal.4th at p. 320.)

Slip op., at 20.  Then the Court cut through the extraneous allegations of the Third Amended Complaint to determine whether any prong of the UCL was sufficiently alleged:

The definitions of unlawful and fraudulent business practices are straightforward and well established. An unlawful business practice under the UCL is "'"'anything that can properly be called a business practice and that at the same time is forbidden by law.'"'" (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180 (Cel-Tech).) A fraudulent business practice is one in which "'"'members of the public are likely to be "deceived."'"'" (Tobacco II, supra, 46 Cal.4th at p. 312.)

Slip op., at 21-22.  The Court also noted the unsettled definition of "unfair" in cases not involving commercial competitors, but it did not need to resolve the dispute, concluding that the other two prongs were sufficient to resolve the appeal.  Returning to the fraudulent prong of the UCL, after underscoring that "fraudulent" under the UCL is distinct from common law fraud, the Court provided more detail about the type of conduct that is "fraudulent" under the UCL:

As noted above, a fraudulent business practice is one that is likely to deceive members of the public. (Tobacco II, supra, 46 Cal.4th at p. 312.) A UCL claim based on the fraudulent prong can be based on representations that deceive because they are untrue, but "'"also those which may be accurate on some level, but will nonetheless tend to mislead or deceive. . . . A perfectly true statement couched in such a manner that it is likely to mislead or deceive the consumer, such as by failure to disclose other relevant information, is actionable under"' the UCL." (McKell, supra, 142 Cal.App.4th at p. 1471.) For example, in Pastoria v. Nationwide Ins., supra, 112 Cal.App.4th 1490, the plaintiffs alleged: (1) they purchased insurance policies based upon the defendant insurance company's description of the premiums, lack of deductibles, and other policy benefits; (2) less than two months later the insurer notified them of significant changes to their policies, including material increases in premiums and substantial deductibles; and (3) the insurer knew of the impending changes to the policies at the time plaintiffs purchased them, but did not communicate that to the plaintiffs. (Id. at p. 1493.) We held that those allegations were sufficient to state a claim for relief under the fraudulent business practices prong of the UCL. (Id. at p. 1499.)

Slip op., at 23-24.  The Court then identified the allegation from Morgan that were comparable:

In the present case, plaintiffs alleged that (1) AT&T marketed and sold expensive T68i phones (which could be operated only on the AT&T GSM/GPRS network) in conjunction with multi-year service plans, and touted the improvements it was making to its GSM/GPRS network; (2) the improvements AT&T made to the network significantly degraded the portion of the network on which the T68i phones operated; and (3) AT&T knew at the time it sold the T68i phones that the improvements it was going make would soon render the T68i phones essentially useless.

Slip op., at 24.  Having concluded that a UCL fraudulent prong violation was alleged, the Court then determined that the plaintiffs had standing to bring the claim, citing Tobacco II:

In Tobacco II, supra, 46 Cal.4th 298, the Supreme Court held that this standing requirement applies only to the named plaintiffs in a class action (id. at pp. 320-321), and that it imposes an actual reliance requirement on named plaintiffs seeking relief under the fraudulent prong of the UCL (id. at p. 326). The court went on to explain what a plaintiff must plead and prove: “while a plaintiff must allege that the defendant's misrepresentations were an immediate cause of the injury-causing conduct, the plaintiff is not required to allege that those misrepresentations were the sole or even the decisive cause of the injury-producing conduct. Furthermore, where, as here, a plaintiff alleges exposure to a long-term advertising campaign, the plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements.” (Id. at p. 328.)

Slip op., at 27.  The Court found that the allegations of an extensive advertising campaign by AT&T, coupled with the plaintiffs' online research and similar representations made to them in AT&T stores sufficiently alleged the necessary reliance element.

The Court did not reach the same conclusion when it turned to the cause of action under the FAL (False Advertising Law), which was based on the claim that the T68i replacement phone was an "upgrade":

AT&T argues that plaintiffs do not have standing to bring this claim. AT&T is correct. Proposition 64 made identical changes to the standing requirements to bring an action under the FAL as it made to the requirements under the UCL. (Californians for Disability Rights v. Mervyn’s, LLC, supra, 39 Cal.4th at p. 229, fn. 2.) A person bringing an action under the FAL must establish that he or she “has suffered injury in fact and has lost money or property as a result of a violation of [the FAL].” (Bus. & Prof. Code, § 17535.) Even if it could be said that the return of a phone that plaintiffs alleged was “useless” constituted an injury in fact, plaintiffs alleged that each of them declined to return their T68i phone. Therefore, they cannot truthfully allege that they lost money or property as a result of AT&T's offer. Accordingly, the trial court did not err by sustaining the demurrer to the FAL cause of action.

Slip op., at 29.

Regarding the CLRA claim, the Court of Appeal clearly resolved a question with respect to CLRA notices for corrective action.  The question is whether the notice must be sent before the initial complaint is filed to permit an amendment seeking damages, or, alternatively, whether it can issue after the initial complaint is filed so long as at least 30 days pass before an amendment seeking damages is filed.  This question gained some traction when a federal district court ruled that the notice must be sent before the initial complaint is filed.  The Court of Appeal disagreed:

The federal district court cases upon which AT&T relies for its assertion that failure to comply with the notice requirement requires dismissal with prejudice fail to properly take into account the purpose of the notice requirement. That requirement exists in order to allow a defendant to avoid liability for damages if the defendant corrects the alleged wrongs within 30 days after notice, or indicates within that 30-day period that it will correct those wrongs within a reasonable time. (See, e.g., Meyer v. Sprint Spectrum L.P., supra, 45 Cal.4th at p. 642; Kagan v. Gibraltar Sav. & Loan Assn., supra, 35 Cal.3d at p. 590.) A dismissal with prejudice of a damages claim filed without the requisite notice is not required to satisfy this purpose. Instead, the claim must simply be dismissed until 30 days or more after the plaintiff complies with the notice requirements. If, before that 30-day period expires the defendant corrects the alleged wrongs or indicates it will correct the wrongs, the defendant cannot be held liable for damages.

Slip op., at 31.  I've been on the short end of this argument, and I'm glad that a California Court of Appeal put an end to what I viewed as an argument disconnected from the purpose of the statutory language.

Regarding the fraud cause of action, the Court of Appeal noted the general rule that fraud must be pled with particularity; however, it then described an important exception:

[T]he Supreme Court has noted, there are “certain exceptions which mitigate the rigor of the rule requiring specific pleading of fraud.” (Children’s Television, supra, 35 Cal.3d at p. 217.) For example, where a fraud claim is based upon numerous misrepresentations, such as an advertising campaign that is alleged to be misleading, plaintiffs need not allege the specific advertisements the individual plaintiffs relied upon; it is sufficient for the plaintiff to provide a representative selection of the advertisements or other statements to indicate the language upon which the implied misrepresentations are based. (Id. at p. 218.) But the court also noted that where a claim of fraud is based upon a long-term advertising campaign, which “may seek to persuade by cumulative impact, not by a particular representation on a particular date . . . [p]laintiffs should be able to base their cause of action upon an allegation that they acted in response to an advertising campaign even if they cannot recall the specific advertisements.” (Id. at p. 219.)

Slip op., at 33.

This opinion offers the first evidence that Tobacco II will prove to be yet another instance where the California Supreme Court has substantially redirected an anti-consumer trend in appellate and trial court rulings.

in brief: Morgan, et al. v. AT&T Wireless Services, Inc. analyzes the sufficiency of allegations under the UCL, CLRA, FAL and common law fraud in a consumer class action

While a more thorough analysis will follow, reader may be interested in taking a look at Morgan, et al. v. AT& T Wireless Services, Inc. (September 23, 2009).  In Morgan, the Court of Appeal (Second Appellate District, Division Four) is called upon to address the sufficiency of allegations in a consumer class action alleging causes of action under the Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.), the False Advertising Law (FAL) (Bus. & Prof. Code, § 17500 et seq.), the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.), and for fraud and declaratory relief.  You can wade through the decision yourself, or wait for the Executive Summary in the next day or so.

In Cho v. Seagate Technology Holdings, Inc. (Klausner, Objector), Court holds that allegations of collusion, without evidentiary support, are insufficient to overturn settlement or allow discovery to objector

In Kullar v. Foot Locker Retail, Inc., 168 Cal. App. 4th 116 (2008), the Court of Appeal (First Appellate District, Division Three) set aside a settlement and permitted an objector to obtain discovery to assess whether the settlement was "fair, reasonable and adequate."  See blog post.  However, the objector in Cho v. Seagate Technology Holdings, Inc. (Klausner, Objector) (September 15, 2009) did not achieve similar results, despite appealing to the very same First Appellate District, Divsion Three.

Cho alleged that Seagate overstated the size of its hard drives (its an ego thing, really) by using the decimal definition of “gigabyte” (equal to 1 billion bytes) which differed from the binary definition (equal to approximately 1.073 billion bytes) that was used by computer operating systems.  Slip op., at 2.  Eventually the matter settled, on the following terms:

For disc drives purchased before January 1, 2006, class members could choose either a cash payment equal to 5 percent of the net purchase price, or the Seagate Software Suite (the Software) that would allow users to perform enhanced computer and disc management functions. The estimated average cash benefit payable per hard drive was $7, and the Software had an estimated retail value of approximately $40. For disc drives purchased after January 1, 2006, when the packaging included more precise disclosures added by Seagate, class members were entitled to receive the Software.

Slip op., at 3.  One objection was filed.  The objector contended that "the notices of settlement were insufficient and inconsistent with the agreement.  He claimed it was not possible to determine 'whether someone who purchased a Seagate Hard Drive (‘Drive’) from a retailer that is not a Seagate authorized retailer, but that retailer purchased the Drive from an authorized distributor, is a class member under the
settlement agreement.'"  Slip op., at 4.  In response to the objection, Cho and Seagate agreed that "'the words "authorized retailer or distributor" in the settlement agreement--which are not defined terms--are meant to include drives purchased either directly or indirectly from the Authorized Retailers or
Authorized Distributors listed on the website, meaning that they include retailers who are not themselves listed on the website, but who purchased from one of the entities that are listed on the website. The only excluded resellers are those whose drive sales are of fake, grey market, used, or stolen drives.'"  Slip op. at 4-5.  The tiral court did not find the objector's concerns persuasive:

The trial court overruled Klausner’s objections. The order approving settlement states: “Mr. Klausner’s objection to the term authorized retailers or distributors, the limitation of claims to purchases from authorized retailers or distributors, and his related claims that the class is impermissibly narrowed, that plaintiff’s counsel have not adequately represented the class and the plaintiff is an inadequate class representative are overruled. The court finds that it is appropriate to limit the class to purchasers from authorized retailers or distributors. . . . The Court received no information that any class member, other than Mr. Klausner, was confused by the term authorized retailer or distributor. In that regard, neither the Agreement nor the form of notice caused any prejudice to the Plaintiff Settlement Class.” Klausner was granted leave to file his additional objections, which were overruled, but his request to undertake discovery was denied.

Slip op., at 6.  After discussing the current authority governing the review of class action settlements, the Court of Appeal concluded that mere inferences of collusion, with nothing more than accusations to support them, would not be considered:

There is no evidence that the parties to the settlement were intentionally deceptive or that they tried to mislead the court in seeking approval. We will not indulge Klausner’s suggestion that approval be reversed on the basis of misconduct by counsel.

Slip op., at 10.  On the other hand, the Court of Appeal was concerned about ambiguity in the Notice to the class:

A class definition that is ambiguous presents a problem of class ascertainability that “ ‘goes to the heart of the question of class certification, which requires a class definition that is “precise, objective and presently ascertainable.” ’ ” (Global Minerals & Metals Corp. v. Superior Court (2003) 113 Cal.App.4th 836, 858.) In the absence of an ascertainable class, “ ‘it is not possible to give adequate notice to class members or to determine after the litigation has concluded who is barred from relitigating.’ ” (Ibid.) The goal in defining the class is to use terminology that will convey sufficient meaning to enable persons hearing it to determine whether they are members of the class plaintiff wishes to represent.

Slip op., at 12.  Applied to the facts of the case before it, the Court of Appeal said:

We have no disagreement with the parties’ objective and no quarrel with the trial court’s finding that exclusion of “those who purchased outside of Seagate’s authorized retail channels” is “rationally based on legitimate considerations.”  The problem is that a fair reading of the class definition and the notice has the potential to lead some of those who purchased within Seagate’s authorized retail channels to conclude they are not members of the class.

Slip op., at 13.  The Court of Appeal then clarified that the defect in the Notice was not fatal to the settlement and vacated the trial court's Order approving the settlement so that a revised Notice could issue to the class.

The final issue, Klausner's request for discovery, was quickly rejected by the Court of Appeal.  The Court noted that objectors are not entitled to discovery unless some evidence of collusion existed.  Because Klausner presented no evidence to the trial court, the Court of Appeal affirmed the trial court's decision to deny discovery rights to the objector.

California Supreme Court activity for the week of August 17, 2009

The California Supreme Court held its (usually) weekly conference today. Notable results include:

• A transfer Order issued in Pfizer, Inc. v. Superior Court (Galfano) following the decision in the lead case, In re Tobacco II Cases, 46 Cal. 4th 298 (2009).  See also, additional comments in this post at The UCL Practitioner.
• A transfer Order issued in McAdams v. Monier following the decision in the lead case, In re Tobacco II Cases, 46 Cal. 4th 298 (2009).
• A Petition for Review was denied in Olvera v. El Pollo Loco (arbitration agreement found unconscionable; no lucky for clucky).

Seventh Circuit provides sharply defined view on class member standing in Kohen, et al. v. Pacific Investment Management Company LLC, et al.

I don't follow the Seventh Circuit's decisions closely.  It's a bit outside my regular commute.  But it has served up an educational opinion about class member standing that is too intriguing to pass up without comment.

Kohen v. Pacific Investment Management Co. (7th Cir. Jul. 7, 2009) follows from a successful Rule 23(f) petition by defendants for permission to appeal a District Court's order certifying a class.  The suit, based on section 22(a) of the Commodity Exchange Act, 7 U.S.C. § 25(a), accuses the defendants (referred to in the appeal as “PIMCO”) of having violated section 9(a) of the Act, 7 U.S.C. § 13(a), by cornering a futures market.  What's a cornered futures market?  Glad you asked.  Circuit Judge Posner explains in a very educational discussion that breaks down how a short seller can monopolize a futures market:

Changes in the demand for or the supply of the underlying commodity will make the price of a futures contract change over the period in which the contract is in force. If the price rises, the “long” (the buyer) benefits, as in our example, and if it falls the “short” (the seller) benefits. But a buyer may be able to force up the price by “cornering” the market—in this case by buying so many June contracts for 10-year Treasury notes that sellers can fulfill their contractual obligations only by dealing with that buyer.

Slip op. at 4.  But defendants were trying to corner financial commodities, and you can't corner the money supply...except in one particular instance involving Treasury notes:

Board of Trade v. SEC, supra, 187 F.3d at 725, remarks that since the possibility of manipulation “comes from the potential imbalance between the deliverable supply and investors’ contract rights near the expiration date[,] . . . [f]inancial futures contracts, which are settled in cash, have no ‘deliverable supply’; there can never be a mismatch between demand and supply near the expiration, or at any other time.” But while it is correct that most financial futures contracts are settled in cash, CFTC v. Zelener, 373 F.3d 861, 865 (7th Cir. 2004); Kolb, supra, at 16, and that if a cash option exists there is no market to corner (no one can corner the U.S. money supply!), futures contracts traded on the Chicago Board of Trade for ten-year U.S. Treasury notes are an exception; they are not “cash settled.” Short sellers who make delivery must do so with approved U.S. Treasury notes; otherwise they must execute offsetting futures contracts.

Slip op. at 5.  The class certified by the district court consisted of all persons who between May 9 and June 30, 2005, bought a June Contract in order to close out a short position.  PIMCO challenged the definition on the ground that it includes persons who lack “standing” to sue because they did not lose money in their speculation on the June Contract.  For example, some of the class members might have taken both short and long positions (in order to hedge—that is, to limit their potential losses) and made more money in the long positions by virtue of PIMCO’s alleged cornering of the market than they lost in their short positions. The plaintiffs acknowledged this possibility but argued that its significance was best determined at the damages stage of the litigation.  The Court rejected PIMCO's contention:

PIMCO argues that before certifying a class the district judge was required to determine which class members had suffered damages. But putting the cart before the horse in that way would vitiate the economies of class action procedure; in effect the trial would precede the certification. It is true that injury is a prerequisite to standing. But as long as one member of a certified class has a plausible claim to have suffered damages, the requirement of standing is satisfied. United States Parole Commission v. Geraghty, 445 U.S. 388, 404 (1980); Wiesmueller v. Kosobucki, 513 F.3d 784, 785-86 (7th Cir. 2008).  This is true even  if the named plaintiff (the class representative) lacks standing, provided that he can be replaced by a class member who has standing. “The named plaintiff who no longer has a stake may not be a suitable class representative, but that is not a matter of jurisdiction and would not disqualify him from continuing as class representative until a more suitable member of the class was found to replace him.” Id. at 786.

Slip op. at 7.  Thus far, the Court has stated little more than settled principles about the ability to substitute class representatives after certification.  But the Court also commented on pre-certification standing:

Before a class is certified, it is true, the named plaintiff must have standing, because at that stage no one else has a legally protected interest in maintaining the suit. Id.; Sosna v. Iowa, 419 U.S. 393, 402 (1975); Walters v. Edgar, 163 F.3d 430, 432-33 (7th Cir. 1998); Murray v. Auslander, 244 F.3d 807, 810 (11th Cir. 2001). And while ordinarily an unchallenged allegation of standing suffices, a colorable challenge requires the plaintiff to meet it rather than stand mute. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992). PIMCO tried to show in the district court that two of the named plaintiffs could not have been injured by the alleged corner. We need not decide whether it succeeded in doing so, because even if it did, that left one named plaintiff with standing, and one is all that is necessary.

Slip op. at 7-8.  The Court then explained that it is unnecessary to know whether all class members have standing to bring claims prior to certification:

What is true is that a class will often include persons who have not been injured by the defendant’s conduct; indeed this is almost inevitable because at the outset of the case many of the members of the class may be unknown, or if they are known still the facts bearing on their claims may be unknown. Such a possibility or indeed inevitability does not preclude class certification, Carnegie v. Household Int’l, supra, 376 F.3d at 661; 1 Alba Conte & Herbert Newberg, Newberg on Class Actions § 2:4, pp. 73-75 (4th ed. 2002), despite statements in some cases that it must be reasonably clear at the outset that all class members were injured by the defendant’s conduct. Adashunas v. Negley, 626 F.2d 600, 604 (7th Cir. 1980); Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006). Those cases focus on the class definition; if the definition is so broad that it sweeps within it persons who could not have been injured by the defendant’s conduct, it is too broad.

Slip op. at 9-10.  Later, California authority received a nod from the Court:

At argument PIMCO’s lawyer told us that he could obtain names of class members. If so, he can, as in Bell v. Farmers Ins. Exchage, 9 Cal. Rptr. 3d 544, 550-51, 568, 571 (Cal. App. 2004), and Long v. Trans World Airlines, Inc., 1988 WL 87051, at *1 (N.D. Ill. Aug. 18, 1988), depose a random sample of class members to determine how many were net gainers from the alleged manipulation and therefore were not injured, and if it turns out to be a high percentage he could urge the district court to revisit its decision to certify the class. Cf. Hilao v. Estate of Marcos, 103 F.3d 767, 782-84 (9th Cir. 1996); Long v. Trans World Airlines, Inc., 761 F. Supp. 1320, 1325-30 (N.D. Ill. 1991); Marisol A. v. Giuliani, 1997 WL 630183, at *1 (S.D.N.Y. Oct. 10, 1997). PIMCO has not done this; should it take the hint and try to do so now, this will be an issue for consideration by the district judge.

Slip op. at 13.  The Opinion finishes with a sharp kick to the shins: "PIMCO’s attempt to derail this suit at the outset is ill timed, ill conceived, and must fail. The district court’s class certification is AFFIRMED."  Slip op. at 15.  Nothing like an educational and blunt opinion to keep legal discourse interesting.

My thanks to Kimberly Kralowec for the mention at UCL Practitioner.  And thanks to some guy whose name sounds like "I am - saw the end" for directing me to the case.

Another day, another liberal Ninth Circuit decision?

I’ve long heard the opinion that the Ninth Circuit is the most “liberal” of the Circuits. The basis for this theory appears to be rooted in a cursory analysis of reversal rates by the Supreme Court in different years. I’ve spent very little of my precious free time examining this contention (okay, none). But I’ve heard the assertion with such regularity that I’ve made the mistake of presuming that it might be accurate. However, analyses by individuals that are recognized as experts suggests that this conventional wisdom is simply wrong. For example, Erwin Chemerinsky, in The Myth Of The Liberal Ninth Circuit (2004), finds that the Ninth Circuit is reversed at the mean rate for all Circuits and has a roughly equal distribution of Justices viewed as liberal or conservative. Andreas Broscheid reaches a similar conclusion in his article entitled Is The 9th Circuit More Liberal Than Other Circuits? (2008). Looking at how class action appeal have fared in recent years suggests that the Ninth Circuit is not the plaintiff’s playground that conventional wisdom describes.

In Desai, et al. v. Deutsche Bank Securities Limited, et al. (July 29, 2009), the Ninth Circuit affirmed a trial court’s denial of class certification in a securities action filed by Hector’s father. In an unusual twist, the unanimous panel issued three opinions to reach the unanimous result, differing only as to the ramifications of the correct standard of review.

The plaintiffs alleged an interesting scheme to manipulate stock prices and avoid the issue of rapid price drops when large blocks of shares are sold:

A common way to manipulate the market in a security is to cause its price to increase by creating the illusion of more investor interest than really exists. The manipulator acquires shares of the security before the price increase, then slowly sells them off and reaps the profit. The problem with this model, however, is that as the manipulator sells off his shares he depresses the price, which lessens his profit. Investors here allege a scheme that varied the theme in a way designed to cure this problem. It involved a commercial arrangement known as a securities loan.

Slip op., at 9904. The details of the scheme are both ingenious and appalling:

Officers of GENI first issued themselves unregistered shares of the company. Such shares may not be publicly traded, but the GENI officers loaned them to a broker-dealer called Native Nations Securities, Inc., receiving cash collateral in return. Richard Evangelista, an employee of Native Nations and apparently a longtime associate of Breedon, falsified the records of his employer to make it look like the GENI shares had come from other broker-dealers. Native Nations then lent the shares (cash collateral coming back) to Deutsche Bank. Breedon was in charge of this account, which continued to absorb unregistered shares of GENI stock. Eventually, Breedon and his associates at GENI developed a chain of broker-dealers that came between Native Nations and Deutsche Bank in order to increase the amount of capital for the scheme and to insulate Deutsche Bank from any fallout should the scheme collapse.

The GENI officers used the cash collateral to day-trade in GENI’s publicly traded shares. This created the appearance of investor demand. That appearance inflated the stock price, which in turn required the borrowers of GENI stock, from Native Nations to Deutsche Bank, to provide more cash collateral to feed the cycle. It also increased the rebate payments to the borrowers, from Native Nations down the line to Deutsche Bank. It seems Deutsche Bank gained the most from the rebate payments, however, because the intermediary brokerdealers in the chain paid out a percentage of the rebates they received to the next party in the chain. Deutsche Bank, being the last in line, did not have to do that.

To ensure that GENI’s price kept climbing, Breedon and his associates at GENI allegedly paid off two stock analysts to recommend GENI stock in order to drum up demand. One of the analysts was Courtney Smith, a one-time defendant in this litigation; the Longs claim that they purchased GENI stock in February of 2000 on the basis of Smith’s bogus recommendations. The secret deal between GENI and Smith later came to light in the news media.

Slip op., at 9905-6, footnote omitted. Much financial anguish then ensued, and that’s just the “simplified” version of the scheme. Evil genius never dies.

In any event, the district court denied a motion for class certification, focusing on reliance issues:

The California district court concluded that individual questions of law or fact predominated over common ones, which sufficed to take the putative class outside of Rule 23(b)(3). The district court focused on the element of reliance, which is required to prove a violation of § 10(b) of the 1934 Act. The district court’s denial of class certification depended on its belief that Investors would have to prove reliance on an individual basis because they could not prove it class-wide. See Basic Inc. v. Levinson, 485 U.S. 224, 242 (1988) (recognizing that such individualized proof of reliance effectively makes it impossible to proceed as a class, because “individual issues then would . . . overwhelm[ ] the common ones”).

Slip op., at 9910, footnotes omitted. To deal with the issue of class-wide reliance, plaintiffs generally have two avenues available to them:

Reliance can be presumed in two situations. In omission cases, courts can presume reliance when the information withheld is material pursuant to Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54 (1972). Reliance can also be presumed in certain circumstances under the so-called “fraud on the market theory.” Basic, 485 U.S. at 241-49. Precisely to which cases this presumption applies—that is, to misrepresentation, to omission, to manipulation cases, or to some combination of the three—is an issue the parties contest on appeal. The two presumptions are conceptually distinct.

Slip op., at 9914. The Court then examined the two reliance presumption avenues. First, it concluded that the omission-based theory was unavailable:

Investors allege that this is an omissions case because “the case as a whole is . . . overwhelmingly non-statement based— in other words, omission-based.” In other words, they seem to assume that as long as liability is not based on misrepresentations, then it must be based on omissions. Relatedly, they argue that because Deutsche Bank and the other former defendants “failed to disclose their active manipulation of GENI stock,” they have made an actionable omission. This approach would collapse manipulative conduct claims and omission claims.

Slip op., at 9916. The Court then declined to create a new “integrity of the market” reliance presumption where the plaintiffs conceded that the market for the securities was not efficient:

We are chary. No authority required the district court to adopt Investors’ integrity of the market presumption. Indeed, the Supreme Court has adopted a rather restrictive view of private suits under § 10(b), noting that, “[t]hough it remains the law, the § 10(b) private right should not be extended beyond its present boundaries.” Stoneridge, 128 S. Ct. at 773. In Stoneridge, the Court listed the Affiliated Ute presumption and the fraud on the market presumption as the two reliance presumptions it has recognized. Id. at 769. After concluding that “[n]either presumption appli[ed],” it did not inquire into any other presumption that seemed appropriate, but simply analyzed whether the plaintiffs could prove reliance directly. Id. These passages may not forbid the recognition of new presumptions, but they do illustrate that the district court did not have to recognize this one.

Slip op., at 9920.  So no class action and no new theories of reliance presumptions in the somewhat arcane securities class action context.  And no plaintiffs bailed out by an activist, liberal Court.

Brinker news, and other California Supreme Court activity

This blog's last post on Brinker Restaurant v. Superior Court (Hohnbaum) indicated that the Reply Brief would be filed on July 6, 2009.  After a few unexpected bumps, the Reply Brief was filed on July 20, 2009.  The case is fully briefed.  Now the amicus bloodbath may commence.

In other Supreme Court news, today the Supreme Court denied review in Gomez v. Lincare (April 28, 2009).  See this prior post for information about Gomez.

And in Miller v. Bank of America, 46 Cal. 4th 630 (2009), the Supreme Court denied a Petition for Modification of the opinion.