Complex Litigation

Supreme Court Review Sought on Crucial Class Action Issues

By Michael Hoenig - New York Law Journal - December 12, 2012

In prior articles I suggested that the explosive growth of consumer class actions in recent years amounted to a "class actionization" of America. Some lawyers skillfully convert ordinary breach of warranty or Lemon Law or consumer fraud act claims into putative class actions of mega-proportions by naming one or two plaintiffs as "representatives" of a mass of faceless, nameless purchasers of the same or similar products. By a twist of the pleader's pen—"Presto Remco!"—the laments of the named plaintiffs in one or two scenarios morph into becoming the putative complaints of perhaps hundreds of thousands, maybe even millions, of other consumers who may have experienced no malfunctions or harms and who have absolutely no interest in being part of the lawsuit now carried in their name.

Indeed, quite another plausible assumption can be made. Perhaps more likely, the class of unidentified mass consumers wants nothing to do with lawyers they don't know, with whom they never spoke or whom they never retained. Indeed, they likely don't want the so-called named "class representatives" speaking for them in a lawsuit that impugns the reputation (or value) of products they own or enjoy. Nor, if informed, would most absent class members favor such behemoth lawsuits. After all, they could, eventually, drive up product prices or divert company funds that otherwise could be used for research and development of improved products. Additionally, such suits may hurt a company's shareholders, many of whom are ordinary individuals and pensioners, or they might adversely impact employees who depend upon the defendant firm's success in the marketplace.

In Wal-Mart Stores v. Dukes,1 an employment discrimination class suit on behalf of some 1.5 million Wal-Mart employees, the U.S. Supreme Court, in a 5-4 decision, stated that the class action is "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only." In order to justify a departure from that rule, a class representative must be part of the class and "possess the same interest" and "suffer the same injury" as the class members. The "commonality" requirement of Federal Civil Procedure Rule 23 requires the plaintiff "to demonstrate that the class members 'have suffered the same injury.'" The class members must not only have a "common contention." It must be of such a nature that it is capable of class-wide resolution. This means that determination of its truth or falsity "will resolve an issue that is central to the validity of each one of the claims in one stroke."2

Further, Wal-Mart teaches that Rule 23 does not set forth a mere pleading standard. A party seeking class certification "must affirmatively demonstrate" his compliance with the rule. The trial court may need to "probe behind the pleadings," to conduct a "rigorous analysis" that class action requirements have been met. Frequently, that "rigorous analysis" will entail some overlap with the merits of the plaintiff's underlying claim.3

Mold Suits

The U.S. Supreme Court, in Whirlpool v. Glazer, No. 12-322, will soon decide whether to accept review of the Sixth Circuit's May 2012 consumer class action decision inIn re: Whirlpool Front-Loading Washer Products Liability Litigation.4 That circuit ruling upheld an Ohio federal district judge's certification of a class of some 200,000 Ohio residents who purchased certain models of Whirlpool washing machines. The named plaintiffs complained that their machines experienced mold or moldy odors.

The impact of the case extends far beyond the certified Ohio class because the Ohio lawsuit is the bellwether action for eight similar cases filed against Whirlpool involving more than 1.5 million purchasers. This makes it one of the largest class proceedings in federal court. Additionally, numerous other lawsuits alleging nearly identical mold problems have been commenced against other washing machine manufacturers and sellers of front-loading washers including Samsung, General Electric, Electrolux, Sears, Miele and others.

Even more significant than the numbers, however, is the presence of truly momentous class action issues nicely teed up for the Supreme Court's consideration by an excellent petition for certiorari and opposition, both crafted by experienced counsel. In many respects the universe of consumer class actions is now at a pivotal crossroads. Will it be a regime dominated by artful class pleadings in which gargantuan classes are speculatively hypothesized on the basis of the experiences of one or two named plaintiffs? Or will courts conduct "rigorous analyses" to limit classes to those who truly suffered actual injury or harm and weed out class suits for buyers who did not?

Whirlpool's petition observes that at least 97 percent of all washer buyers have never experienced a problem with mold or moldy odors and therefore cannot show any cognizable injury under Ohio tort law. Nevertheless, the U.S. Court of Appeals for the Sixth Circuit certified those "non-injury" purchasers to be members of the "liability" class it approved. This ruling, Whirlpool argues, contravenes a pivotal holding in the Supreme Court's Wal-Mart decision that named class members as well as absent class members must suffer "the same injury."5

Monumental questions are raised. May a court certify a class action even though most class members have not been harmed? Further, if factual disputes exist that bear directly upon the requirements of Rule 23, must the court resolve them before certifying the class? And, what happens when factual dissimilarities among putative class members raise loads of individualized issues? Does that cause the individual issues to predominate over the common issues making class certification inappropriate?

In their opposition, the plaintiffs in Glazer argue that the percentage of washer buyers experiencing mold and odors was greater than the 3 percent claimed by Whirlpool. More importantly, they argue that class claims are and should be permitted on behalf of individuals exposed to harm who have not yet proved entitlement to damages. Plaintiffs argue that certification of a class action is an issue separate from a claimant's right to recover damages. Therefore, class certification is permissible even though a plaintiff may eventually not recover. They say that when a class member receives a defective product, a "concrete and particularized" injury occurs then and there because "every class member paid money for a non-defective product."

Further, they claim that a purchaser is entitled to "benefit-of-the-bargain" damages for breach of warranty, i.e., the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted. A variant of this theory of harm seems to have been adopted by the Sixth Circuit as a rationale for class certification: "Additionally, the class plaintiffs may be able to show that each class member was injured at the point of sale upon paying a premium price for the [washer] as designed…."6

'Standing' Issues

This battle, in legal parlance, concerns what is called Article III "standing." In order to constitutionally be able to sue, plaintiffs must establish an "actual" and "concrete" injury in fact that is particularized to them.7 Many courts have held that in product defect cases "no injury" plaintiffs who suffer only a risk that an alleged defect may someday materialize lack Article III standing.8

Proper standing to sue requires a plaintiff to demonstrate that the purported defect has actually manifested itself in his or her product or, at least, inevitably will. Plaintiffs' class counsel posit that the Sixth Circuit's "premium price" theory or what they call the "benefit of bargain" damages or what some others label as a product's "diminution of value" confers constitutional standing. Defendants' class counsel say "no." Such hypotheses are a pleader's fiction. Rather, all class plaintiffs must have suffered actual or inevitable injury or harm from the alleged defect.

In the opinion of this writer, a buyer of a product who has not, in fact, himself suffered an accident, mishap or adverse event or an actual harm has not established standing to sue in tort or breach of warranty. A pleading merely alleging that a product defect, breach of warranty or some deficiency exists and some other persons may have been harmed does not confer standing to sue. As long as the buyer continues to use the product without actual manifestation of the alleged defect, the allegation of an injury is purely hypothetical. Further, if the buyer has not attempted to sell the allegedly defective product to concretize and validate that some economic harm attributable to the purported defect actually occurred, the alleged economic loss is purely hypothetical. The "injury," so to speak, rests in the air, inchoate, a sheer figment of the pleader's creative imagination.

This can be seen well when considering automobiles, for example. Apart from actual damage or harm that may have been sustained by a named plaintiff and specified in the pleading, class generalizations about existence of the same defect in vehicles owned by putative class members who have not actually suffered harm and who continue to use their cars amount to nothing more than speculative conclusions. No one can know whether an unnamed class member's vehicle has diminished in value until that owner sells the car (or tries to).

Indeed, as is well known, the value of a used car at a given point in time depends on numerous variables then in existence. Among those is supply and demand. So, for example, in a bad economy used cars may fetch a premium price because buyers cannot afford to purchase expensive new cars. Conversely, when fuel is expensive, the used car's resale price may go down if it is a gas guzzler and gets poor mileage. Until a sale actually occurs and the applicable facts materialize, we cannot know that the defect claimed in the complaint would have anything to do with any diminution of the car's value. Thus, the claim of a class harm rests on rank speculation and the alleged damage has not occurred sufficiently to confer "standing" to sue in tort or warranty.

Seventh Circuit Case

Review by the Supreme Court is desirable because such significant crossroads issues will fester. Already just weeks ago, the U.S. Court of Appeals for the Seventh Circuit, in Butler v. Sears, Roebuck & Co.,9 reversed a trial court's denial of class certification regarding claims that mold growth occurred in certain washing machines. Suit was based on the warranty laws of six states. The appellate court in Butler said that it accepted the interlocutory appeal "to clarify the concept of 'predominance' in class action litigation." That concerns how much the individualized issues might overwhelm the common issues so that class certification would be inappropriate.

But the Butler court did not confront the issue of "standing." It did not even mention the question. Further, although the Butler court says that it agreed with the Sixth Circuit's decision in Glazer, it also stated that to uphold the denial of class certification below "would be to create an intercircuit conflict." Yet, as the Glazer petition for certiorari and the opposition now before the Supreme Court reflect, the question of an intercircuit conflict on important class issues is already before the court.

Strangely, the Seventh Circuit identifies the "common question" regarding the entire mold class to be whether the machines were defective in permitting mold to accumulate but, then, the court concedes that the answer "may vary with the differences in design." However, if the answer may vary depending on the design differences, how can this present a good common issue for class purposes? In Wal-Mart v. Dukes, the court held that the "common contention" must be of such a nature that it is capable of class-wide resolution of an issue that is central to the validity of each claim "in one stroke."10 An answer that varies with the design differences does not offer a resolution of each claim in one stroke and, therefore, Butler conflicts with Wal-Mart.

Finally, the Butler decision adopts a "certify-first" approach based on a "common" contention and then, only later, would take care of individualized competing issues. But that is not what Rule 23 or a "rigorous analysis" requires. It is the weighing of the burdens of the individualized conflicts against the perceived efficiency of the common issue that is necessary. A "certify-now-and-we-will-take-care-of-problems-later" approach simply favors knee-jerk approval of giant class actions. That would create huge litigation costs, unduly burden the courts and force large settlements under the duress of mega-exposures.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes:

1. 131 S. Ct. 2541, 2011 U.S. LEXIS 4567 (2011).

2. 131 S. Ct. at 2550-2551.

3. Id. at 2551.

4. 678 F.3d 409 (6th Cir. 2012), pet. for cert. and opposition filed in Whirlpool v. Glazer, No. 12-322 (2012). Coincidentally, the December 2012 issue of the ABA Journal, at pp. 15-16, presents an article reporting that the Sixth Circuit has surpassed the Ninth as the "most reversed" appeals court.

5. Wal-Mart Stores v. Dukes, 131 S. Ct. 2541, 2551 (2011).

6. 678 F.3d at 420.

7. E.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 576-577 (1992).

8. E.g., Birdsong v, Apple, 590 F.3d 955, 961 (9th Cir. 2009); Briehl v. General Motors, 172 F.3d 623, 628-629 (8th Cir. 1999); DaimlerChrysler v. Inman, 252 S.W.3d 299, 306 (Texas 2008).

9. 2012 U.S. App. LEXIS 23284 (7th Cir. Nov. 13, 2012).

10. 131 S. Ct. at 2551.

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