Class Action Lawsuit Defense

Class Action Lawsuit Defense

Class Action Defense News, Developments and Commentary

Sixth Circuit Affirms Certification and Summary Judgment for TCPA Class, Despite State Law Class Action Prohibition

Posted in Class Actions Privacy, Class Certification, Consumer Class Action, State Class Action Law, TCPA

On July 9, 2014, the Sixth Circuit affirmed a district court ruling that a consumer TCPA class action could proceed against Lake City Industrial Products, rejecting Lake City’s argument that Michigan law prohibited TCPA class actions.  American Copper & Brass, Inc. v. Lake City Industrial Products, Inc., Case No. 13-2605, (6th Cir. 2014).  In addition, Lake City’s potential bankruptcy and inability to pay a judgment was irrelevant at this stage of the case, so summary judgment also was affirmed.

In February 2006, Lake City, a pipe-thread sealing tape distributor, retained a fax-blasting company to transmit approximately 10,000 Lake City advertisements.  American Copper, a Michigan equipment wholesaler, received Lake City’s fax later that month.  American Copper had no preexisting business relationship with Lake City and had not consented to the receipt of faxes from Lake City.  American Copper filed a class action law suit in federal district court in Michigan in 2009, alleging that Lake City violated the Telephone Consumer Protection Act (TCPA).  The district court granted class certification and summary judgment in favor of American Copper, and Lake City appealed.

On appeal, Lake City argued that the district court erred by refusing to apply Michigan Court Rule 3.501(A)(5), which states that an “action for a penalty or minimum amount of recovery without regard to actual damages imposed or authorized by statute may not be maintained as a class action unless the statute specifically authorizes its recovery in a class action.”  The Sixth Circuit acknowledged that because the TCPA provides for a minimum recovery of $500 per violation, regardless of actual damages, and does not specifically authorize class actions, TCPA suits cannot be maintained as class actions in Michigan state court.

Noting the “general rule” that the Federal Rules of Civil Procedure apply to all civil cases brought in federal courts, the court affirmed the district court’s rejection of Lake City’s argument.  There are “rare exceptions,” however, where Congress may bypass the federal rules and require federal courts to apply state procedure.  Seizing on the following language, Lake City argued that the TCPA evinces Congress’s intent that state procedural rules apply to all TCPA cases:

A person or entity may, if otherwise permitted by the laws or rules of court of a State, bring in an appropriate court of that State –

(A) an action based on a violation of this subsection or the regulations prescribed under this subsection to enjoin such violation,

(B) an action to recover for actual monetary loss from such a violation, or to receive $500 in damages for each such violation, whichever is greater, or

(C) both such actions.

47 U.S.C. 227(b)(3) (italics added).

The Sixth Circuit held that “[t]he better view of this state-oriented language relied on by Lake City . . . is that Congress simply intended to ‘enable states to decide whether and how to spend their resources on TCPA enforcement.’” Id. at 8, citing Giovanniello v. ALM Media, LLC, 726 F.3d 106, 114 (2d Cir. 2013).  While admitting that its holding could lead to forum shopping, the Court noted a recent United States Supreme Court case — Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co,. 559 U.S. 393, 416 (2010) — which held that a “Federal Rule governing procedure is valid whether or not it alters the outcome of the case in a way that induces forum shopping.”

The Court also held that the district court correctly disregarded Lake City’s assertion that summary judgment would lead to its bankruptcy.  “Lake City’s ability (or inability) to pay a judgment was irrelevant at the summary judgment stage of the case.”  Opinion at 4.

As this case demonstrates, the stakes in TCPA cases could not be higher for the unwary.  Businesses are urged to seek appropriate counsel before undertaking activities that might implicate the statute.

Basic Is Dying a Slow Death: The Supreme Court Upholds the Fraud-on-the-Market Presumption in Halliburton but Allows Rebuttal

Posted in Securities

Given the opportunity to overrule its landmark 1988 decision in Basic v. Levinson, in which it created the fraud-on-the-market presumption, the Supreme Court declined. The Court found in its decision this week in Halliburton that, while it was not ready to dismiss the presumption altogether, it would allow defendants to offer rebuttal evidence at the class certification stage. Halliburton is another example, along with Wal-Mart and Amgen,[1] of the Court’s recent trend toward expanding the scope of the class certification inquiry, thereby allowing defendants another option for defeating securities fraud actions prior to any discovery as to the merits in the case. While some plaintiffs are hailing the decision as a victory, the benefits the decision provides to the defense bar can not be overstated. The Justices’ 9-0 opinion now will allow defendants to rebut the applicability of the presumption at the class certification stage. Basic may not have been overturned, but it is no longer the powerful plaintiffs’ tool it once was. The bottom line for defendants: “You can’t always get what you want, but sometimes you get what you need.”

The Path to the Supreme Court

Halliburton involved a claim under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder brought by a class of Halliburton shareholders.[2] After already making one trip up to the Supreme Court several years ago, the case had been remanded to the district court to determine whether a class should be certified. On remand, the district court granted class certification and Halliburton appealed, for a second time, arguing that plaintiffs were not entitled to the fraud-on-the-market presumption because the alleged misrepresentations had not impacted the stock price. Thus, the case eventually made its way back to the Supreme Court, which certified two questions: whether Basic should be overruled and the fraud-on-the-market presumption eliminated; and whether defendants should be allowed to present rebuttal evidence at the class certification stage.

Plaintiffs May Still Rely on the Fraud-on-the-Market Presumption

In Basic, the Court determined that securities fraud class plaintiffs did not need to demonstrate individual reliance on alleged misstatements. Instead, plaintiffs could rely on the “fraud-on-the-market presumption.” The presumption is based on the economic theory that all material information about a company is disseminated into and absorbed by the market place, and is reflected in the stock price. Thus, anyone who purchases the stock in the market essentially “relies” on the integrity of the market price. Halliburton asked the Court to overrule Basic and deny plaintiffs the benefit of the fraud-on-the-market presumption.

In a decision authored by Chief Justice John G. Roberts, Jr., in which all Justices joined, the Court rejected Halliburton’s invitation to overrule Basic. The Court did not reaffirm the correctness of its earlier ruling, but rather found only that there was no “special justification” that warranted overruling long-standing precedent. The Court recognized that “[a]lthough the presumption is a judicially created doctrine designed to implement a judicially created cause of action, we have described the doctrine as ‘a substantive doctrine of federal securities-fraud law.’” So, for the near future, the fraud-on-the-market presumption stands.

Defendants Can Rebut the Presumption at Class Certification

The second question the Court addressed was whether defendants can rebut the fraud-on-the-market presumption before a class is certified. The Court answered this question in the affirmative, giving defendants another weapon against certification.

In order to invoke the presumption, plaintiffs must demonstrate that the alleged misrepresentations were public and material and the defendant’s stock traded in an efficient market. Defendants may then rebut the presumption by proving that the misstatements did not in fact impact the price of the security. Thus, if the market price was not impacted, then plaintiffs cannot argue they “relied” on the misstatement when they “relied” on the market price. Defendants were already allowed to present this evidence at summary judgment and trial, but the issue before the Court was whether defendants were entitled to make the argument at class certification and before significant discovery costs and legal expenses were incurred.

Significantly, the Court held that defendants do have the right to present this evidence in opposition to class certification, reasoning that the evidence relates to the question of predominance. Plaintiffs must demonstrate that common questions predominate over individualized questions, which includes invoking the fraud-on-the-market presumption to avoid individual questions of reliance. District courts will now determine whether the presumption applies before granting class certification and, thus, should be allowed to consider arguments both for and against invoking the presumption. As the Court reasoned: “Price impact is . . . an essential precondition for any Rule 10b-5 class action. While Basic allows plaintiffs to establish that precondition indirectly, it does not require courts to ignore a defendant’s direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock’s market price and, consequently, that the Basic presumption does not apply.”

No matter the spin the plaintiffs’ bar puts on it, Halliburton is a win for defendants. It was hard to imagine the Court would overrule over 25 years of precedent in Basic and, in effect, eliminate class actions under section 10(b). The Court has, however, provided securities fraud class action defendants another out prior to class certification. This issue will likely play out as a battle of the experts as the parties argue over what caused movements in a stock’s price. As the Court has acknowledged, class certification is often the death knell of securities fraud class actions as it forces defendants into settlement. Once a class is certified, the potential damages increase so astronomically that defendants are often forced to settle. Defendants now have another argument against class certification, and one that will undoubtedly become a staple in opposing class certification.

If you have any questions about this alert, please contact Marc D. Powers at or 212.589.4216; Paul G. Karlsgodt at or 303.764.4013; Mark A. Kornfeld at or 212.589.4652; Deborah H. Renner at or 212.589.4654; or any member of BakerHostetler’s Class Action Defense or Securities Litigation and Regulatory Enforcement teams.

Editor’s Note: This BakerHostetler Alert was issued June 26, 2014. Authored by: Marc D. Powers, Mark A. Kornfeld, Deborah H. Renner, and Jessie M. Gabriel 

[1] For a discussion of the Amgen decision, please refer to our Executive Alert of March 8, 2013, A Big Week for the Securities Bar: Amgen and Gabelli.
[2] For further information on the background of the case leading up to the Supreme Court’s recent decision, please refer to our Executive Alert of September 30, 2013, Basic Is Anything But: Courts Continue to Wrangle with the Fraud-on-the-Market Presumption.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.

Low-Tech Proof In a High-Tech World: Northern District of California Denies Class Certification In Hulu Data Privacy Case

Posted in Class Actions Privacy, Class Certification, Rule 23 Requirements

On June 16, the Northern District of California denied a motion for class certification in In re Hulu Privacy Litigation, No. C 11-03764 LB, ECF No. 111.  The plaintiffs in that action alleged that Hulu violated the Video Privacy Protection Act (“VPPA”) by disclosing personal identification information (“PII”) to third parties, including Facebook.  Hulu provides its users with online, on-demand access to video content, such as television programs and movies.  The PII allegedly disclosed was the plaintiffs’ video viewing selections on Hulu.  The Court denied the motion without prejudice, holding that the class was not ascertainable because the plaintiffs proposed to rely on self-reporting affidavits to prove class membership.

This decision represents an interesting contrast between allegations of high-tech data privacy violations and low-tech methods of proof.  As discussed below, the plaintiffs’ failure to corroborate their self-reporting affidavits by reference to the defendant’s records was fatal to their proposed identification of class members.  This failure is especially noticeable in a case where the alleged violations involve transmissions of electronic data identifying the plaintiffs.  Moreover, because internet based services like Hulu and Facebook reach millions of customers, the potential damage awards can soar into the billions of dollars.  This is especially true in the context of the VPPA, which provides for a relatively large statutory damage award of $2,500 per person.  As the Court reasoned in this case, such a large pot of gold can distort the purpose of both class actions and statutory damages, and further increases the importance of objective forms of proof at the class certification stage.

Plaintiffs’ Disclosure Theory

The named plaintiffs claimed that their PII was disclosed to Facebook as a result of Hulu’s inclusion of a Facebook “Like” button on its “watch page.”  A watch page is a unique webpage generated each time a Hulu user selects video content to view on  Specifically, the plaintiffs claimed that when they selected video content to view on, Hulu loaded a watch page that included the Like button.  The mere loading of the Like button caused certain information to be automatically sent to Facebook, including the uniform resource locator (“URL”), or web address of the watch page.  During the class period, the URL of Hulu’s watch pages included the title of the video content the Hulu user selected.  This alone, however, did not disclose the identity of the Hulu user to Facebook.  In order for Facebook to connect the title of the video to a specific Facebook user, an additional piece of information was required in the form of a “c_user” web cookie.  The c-user cookie, which contained the Hulu users’ Facebook ID, would automatically be sent to Facebook when the Like button on the watch page loaded. This only occurred, however, when a Hulu user watched a video on the same computer and web browser used to access Facebook in the previous four weeks, while using the default settings.

Ascertaining the Putative Class

In order for a class to be certified, as the Court instructed, it must “be sufficiently definite and ‘clearly ascertainable’ by reference to objective criteria ‘so that it is administratively feasible for a court to determine whether a particular person is a class member and thus bound by the judgment.”  Here, the Court found the class is comprised of users of both Facebook and Hulu during the class period who actually had their PPI transmitted to Facebook.

Although the plaintiffs did not suggest it, the Court opined that the first part of this question—identifying users of both Faceboook and Hulu during the class period—could be easily determined by cross-referencing the user email addresses of both services.  Determining which of those users actually had their PII transmitted to Facebook, however, is not so simple.

There was no dispute that relevant disclosure was the transmission of the c-user cookie.  If the c-user cookie had been cleared from a particular Hulu users’ computer, it could not be transmitted to Facebook when the Like button loaded, and there was no disclosure in violation of the VPPA.  The Court found that there are various situations where the c-user cookie would be cleared from a Hulu user’s web browser.  For example, the c_user cookie would not be sent if the Hulu user logged out of Facebook, used different web browsers to access Facebook and Hulu, manually cleared the cookies on their web browser, or used software that blocked cookies.

Accordingly, in order to define the class, the plaintiffs would have to show that each class member: (i) logged onto Hulu and Facebook from the same browser; (ii) did not log out of Facebook; (iii) did not set their browsers to clear cookies; and (iv) did not use software to block cookies.  The plaintiffs only proposed method for determining the class members was self-reporting affidavits.  To that end, the named plaintiffs submitted declarations attesting that they were Facebook users who accessed Facebook on the same computer they used to watch videos on   They also claimed that they had not cleared their cookies in some time nor used any ad-blocking software.

The Court rejected this method of defining the class members, reasoning that because the potential damages for each plaintiff are relatively high, some form of verification beyond a self-reporting affidavit is required.  It explained that “objective criteria (such as corroboration by reference to a defendant’s records or provision of some proof of purchase) are important to establishing class membership as opposed to relying only on potential members’ say-so and subjective memories that may be imperfect.”

The Court likened the plaintiffs’ reliance on the memory of the potential class members here to subjective estimates of smokers’ long term smoking habits in Xavier v. Philip Morris USA Inc., 787 F.Supp. 2d 1075 (N.D. Cal. 2011), where a court denied class certification.  The Court also reasoned that the incentive of a relatively high statutory damage award of $2,500 per class member is relevant to analyzing the credibility of the plaintiffs’ self-reporting affidavits.

Because the self-reporting affidavits were the only proposed method the plaintiffs offered to identify class members, the Court denied their class certification motion holding that they failed to define an ascertainable class.

Low-Tech Proof In a High-Tech World

Paradoxically, in attempting to define a class of plaintiffs aggrieved through high-tech, electronic communications that are largely invisible to the end user, the plaintiff relied on the very low-tech and unreliable method of self-reporting.  The Court did not shy away from delving deep into the weeds of how electronic communications, such as cookies and URLs, are transmitted in determining whether the plaintiffs could adequately define a class.

It also, apparently, did not lose sight of the key issues of fact that would need to be determined: (i) whether Hulu transmitted information to Facebook that allowed Facebook to identify a specific person and connect their identity to the specific video materials they requested or viewed; and (ii) if so, whether Hulu did so knowingly.

Presumably, Hulu would only have knowingly disclosed such information to Facebook in support of some business purpose.  As the Court noted, Hulu’s main source of income is advertising revenue.  Facebook’s business model is similarly based on advertising revenue.  This was not lost on the Court, which noted that there was no evidence that Facebook took any action with the information it allegedly received from Hulu.

Had Hulu or Facebook used the alleged PII in support of their respective businesses there would presumably be some record.  For example, one would expect there to be business records such as emails and legal agreements memorializing the purpose of Hulu transferring the alleged PII to Facebook.  Additionally, there would also likely be some type of electronic record created by Facebook’s collection and use of the alleged PII.  A reference to such records would have provided  “objective criteria” corroborating the plaintiffs’ self-reporting affidavits.  This is precisely what that the Court found was lacking from the plaintiffs’ proposed method of defining the class.  Indeed, had the plaintiffs been able to reference electronic records showing that Facebook actually collected and used the PII—which by definition contains the Hulu users’ identities—that alone would have likely defined the class.

There is also little question that the potentially enormous damage award in this case played into the Court’s refusal to rely on the plaintiff’s self-reporting affidavits.  As the Court stated, “[t]he possibility of substantial pecuniary gain affects the[] analysis [of the affidavits’ credibility].  That incentive . . . makes this case different than the small-ticket consumer protection class actions that this district certifies routinely.”  The Court did not stop there, however, discussing the potential damage award again in response to due process concerns raised by Hulu.

Hulu claimed that the statutory damage award of $2,500 per class member would result in an aggregated damage award of billions of dollars, and argued that this ran afoul of due process.  The court agreed noting that such an “award is wildly disproportionate to any adverse effects class members suffered, and it shocks the conscience.”  Moreover, the Court reasoned, such an enormous damage award “potentially distorts the purpose of both statutory damages and class actions” and “may induce an unfair settlement.” Ultimately, the Court declined to address this issue, finding that it is “best addressed after a class is certified.”

Genzyme First Circuit Decision

Posted in Class Action Trends, Consumer Class Action, Securities

First Circuit Sides with Pharmaceutical Manufacturer in Dismissing Shareholder Class Action

In a huge victory for Massachusetts-based biologics manufacturer Genzyme Corporation, the First Circuit Court of Appeals on June 5, 2014 affirmed the District Court’s dismissal of a multi-million dollar shareholder class action stemming from allegedly misleading statements regarding the approval prospects for one of its best-selling drugs.  Deka Int’l S.A. Luxembourg v. Genzyme Corp. (In re Genzyme Corp. Secs. Lit.), — F.3d —, 2014 WL 2535076 (1st Cir. June 5, 2014).  

The Court found that the allegations in the complaint failed to satisfy the “exacting standards” of the Private Securities Litigation Reform Act (“PSLRA”), which requires securities fraud complaints to contain allegations sufficient to create a “strong inference” of fraudulent intent.  The Court held that the plaintiffs’ allegations lent themselves to a number of equally—if not more—compelling inferences that Genzyme executives acted innocently.

Ill Organized and Convoluted” Complaint

The lawsuit stemmed from a plunge in Genzyme stock, which followed various disclosures throughout 2008 and 2009 regarding the fate of one of Genzyme’s FDA approval applications.  Genzyme manufactures and markets drugs known as “biologics,” or drugs derived from biological sources rather than through chemical processes.  In April 2006, the FDA granted Genzyme’s “biologics license application” (“BLA”), and approved the manufacture of “Myozene,” a biologic used in the treatment of a rare metabolic disorder called Pompe disease.  The approval permitted Genzyme to manufacture Myozene only on a small scale—using 160-liter “bioreactors.”  However, after realizing Genzyme needed to ramp up output to meet rising demand, the company in 2007 filed a “supplemental” BLA seeking FDA approval to manufacture “Lumizyme,” or Myozene created in larger, 2,000-liter bioreactors.

According to the plaintiffs, Genzyme executives repeatedly misled investors about the fate of the Lumizyme supplemental BLA, concealing key red flags about the drug’s approval prospects and in the process artificially inflating Genzyme stock.  They charged the defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act.

The Court, however, said the complaint was an “ill organized and convoluted collection of 364 paragraphs” that failed to “muster sufficient strength to meet the formidable pleading standard set by Congress for securities fraud claims under Section 10(b).”

“Forward-Looking Projections” Not Actionable Under Section 10(b)

First, plaintiffs alleged the defendants failed to disclose a report from an October 2008 FDA inspection for its Allston, Massachusetts facility that “observed” several potential deviations from biologics manufacturing standards.  According to the plaintiffs, Genyzme intentionally failed to mention the FDA’s report during an October 22, 2008 conference call, despite being aware of its importance to investors.  In fact, Genzyme failed to disclose the FDA’s report until March 2, 2009, after it received a “Formal Warning Letter” from the FDA reiterating a number of issues from its October 2008 report, along with a “Complete Response Letter” stating Lumizyme approval was being withheld pending those issues’ resolution.

The Court held that the allegations—rather than supporting an inference of fraudulent intent—supported an alternative, equally plausible theory:  that the defendants ultimately disclosed the FDA’s inspection report once its relevance “became apparent” to Genzyme.  The Court noted that Section 10(b) only imposes an affirmative duty to disclose information that is necessary to render earlier-disclosed information not misleading.  Here, Genzyme had no reason to suspect it had previously misled investors about Lumizyme’s approval prospects until it received the February Warning Letter and the first Complete Response Letter, which “crystalized the relevance” of the FDA’s October 2008 report.  This, along with the merely “observational” nature of the FDA’s October 2008 report, meant that Genzyme had no cause to believe that Lumizyme’s approval prospects were anything but solid.

Second, the plaintiffs alleged that the defendants fraudulently failed to disclose “bioreactor failure events” at two of its facilities, which purportedly jeopardized Lumizyme’s approval prospects.  But the Court said the failures “bore no relation” to Lumizyme’s approval.  Further, Genzyme launched an internal investigation into the failures and disclosed its findings as soon as it ascertained the failures’ cause.  The Court, admonishing that “a corporation cannot be expected to inform the market of any and all developments that might possibly affect stock value,” held that it was proper for Genzyme to open an inquiry and “wait for a complete picture to become apparent” before making any formal announcements.

Third, the plaintiffs asserted generally that the defendants deceived the market by falsely assuring investors that Lumizyme’s BLA would be approved.  For example, a Genzyme Vice President had told investors the likelihood of approval “seemed” to be “taking a more solid shape,” and Genzyme’s CEO stated Genzyme was “working very hard with the FDA to get everything done.”  But the Court held that although the defendants used “rather rosy language to express optimism,” this language was “far from categorical” and made clear that approval “would be months away.”  Genzyme’s communications “were accompanied, and supplemented, by full and prompt disclosure of all relevant communications from the FDA, . . . as well as revised earnings projections.”  Accordingly, these were “mere forward-looking projections that [were] not actionable Section 10(b) transgressions.”

The Final Blow

The Court delivered the final blow to plaintiffs in denying their motion for leave to amend the complaint.  Plaintiffs wanted to add new facts that allegedly strengthened their case as to the defendants’ fraudulent intent.  Most of this information, however, was concededly available before the District Court’s decision—which occurred two years after the complaint was filed.  In other words, the plaintiffs had two years to present their new facts but failed to seize on that opportunity.

The Court did express “discomfort” with the District Court’s decision to dismiss the complaint without prejudice.  It cautioned that the PSRLA did not alter the “liberal amendment policy” of the Federal Rules of Civil Procedure.  Nevertheless, it was “within the bounds of the district court’s discretion” to do so, and the Court was not at liberty to alter that decision.  This, of course, being no consolation for the plaintiffs, whose chances for recovery have been snuffed out completely.

Judge Posner Identifies Some Warning Signs Of An Unfair Class Settlement

Posted in Settlements

On June 2, 2014, the United States Court of Appeals for the Seventh Circuit rejected a class action settlement in Eubank v. Pella Corp., Nos. 13-2091, -2133, 2136, -2162, 2202 (7th Cir., June 2, 2014) that the Court labeled “inequitable – even scandalous.”  The Opinion, written by Judge Posner, identified a myriad of warning signs that demonstrated that the settlement “flunked the ‘fairness’ standard,” and should have been rejected by the district court.

1.  The Class Representative’s “Palpable” and “Grave” Conflict of Interest:  Class representatives are fiduciaries of the class.  The core class representative, however, had divided loyalties – his son-in-law was lead counsel for the class and his daughter, who was married to class counsel, was a partner in her husband’s firm.

2.  Class Counsel’s Financial and Ethical Woes Rendered Him Inadequate To Serve As Class Counsel:  Class counsel serves as a fiduciary for the class as a whole; however, there were numerous indications that lead counsel in this case could not serve that role.  Lead counsel and his wife were embroiled in a lawsuit over the alleged misappropriation of the assets of their former law firm, which apparently dissolved and descended into “open warfare” between its former partners.  The Court noted that the “articulated financial needs” of class counsel may have driven settlement of the class action.

Moreover, lead counsel was also involved in a serious ethical proceeding, and was ultimately recommended for disbarment by the Supreme Court of Illinois due to “repeated misconduct.”  Lead counsel’s pending ethics case, in and of itself, was a “compelling reason to kick class counsel off the case.”  But the ethical and financial problems together gave class counsel a powerful incentive to act in his own interest; instead of that of the class.  Class counsel “may have been desperate to settle the case and obtain a large attorneys’ fee in this case before the financial roof fell in on him.”

3.  Four Out Of The Five Original Class Members Objected To The Settlement:  When the settlement agreement was presented to the Court, class counsel’s son-in-law was the only class member who supported the settlement.  The remaining class members opposed it.  The objecting class members were replaced; the replacements, selected by class counsel, supported the settlement.

4.  The Settlement Agreement Did Not Provide Incentive Awards To Class Representatives That Opposed The Settlement:  This created a conflict of interest because any representative that opposed the settlement would be stripped of compensation.

5.  Attorneys’ Fees Versus Value To The Class:  Class counsel was to receive $11 million in attorneys’ fees under the settlement.  In fact, the settlement provided that $2 million in fees were to be paid before notice was sent to class.  And any reduction of the attorney fee award would revert to Pella, not the class members.

The benefit to class counsel was clear, however, the benefit to the class was not.  Class counsel estimated the value of the settlement as $90 million, and Pella estimated the value of the settlement at $22.5 million.  But after examining the settlement and the submitted claims, Judge Posner put the settlement value at about $1 million.  Judge Posner noted that the district court should have made some responsible prediction of the settlement’s value to the class members before approving the settlement.

6.  Overcomplicated Claims Process To Obtain Modest Relief:   While class counsel received their fees up front, class members obtained the right to make claims under a process “bristling [with] technicalities.”  In order to receive compensation, or coupons, class representatives had to complete a claim form that was 12–13 pages long and also submit a “slew of arcane data.”  Pella could reject the forms if they were not filled out completely and correctly.

Class members could fill out a “simple” claim to receive a maximum of $750; however, the claim process was rife with conditions that made a maximum recovery unlikely.  Alternatively, class members could opt to run the “gauntlet” of arbitration and receive up to $6,000.  But the arbitration process was burdensome, and allowed Pella to assert numerous defenses such that, even on a valid claim, it could reduce any recovery by 75%.  And the class member would have to bear the cost of arbitration.

7.  Class Notice Was Incomplete And Misleading:  Class notice was 27-pages long, yet failed to mention numerous key facts.  For example, it did not state that four of the five original class members objected to the settlement and were subsequently replaced, it did not mention the conflicts of interest of the class representative and lead counsel, or that lead counsel was in “financial trouble and ethically challenged,” and it did not mention that up to half of those that received notice would, if they filed a claim (and it was approved), receive a coupon for the purchase of a new Pella window.  Of the 225,000 claim forms issued, 5% of the claim forms were returned to Pella.

8.  The Objections Were Ignored:  Judge Posner noted that “district judges presiding over [class action settlements] . . . are expected to give careful scrutiny to the terms of the proposed settlement to make sure that class counsel are behaving as honest fiduciaries for the class as a whole.”  But despite the issues with the settlement, and the objections of the former class representatives, the district court’s approval of the settlement was squeezed into two two-page orders” and the objections of the former class members were “virtually ignored.”

9.  Adversity amongst subgroups:  Prior to the settlement, two main subclasses were certified – one for customers that already replaced or repaired their windows, and a second that sought only declaratory relief.  The damages class was limited to six states, with a subclass for each state; the declaratory relief class was nationwide.  The settlement agreement, however, purported to bind a single nationwide class consisting of all window owners.  The different remedies indicated that there was “adversity among subgroups,” which meant that all members of each subgroup [could not] be bound to [the] settlement except by consents given by those who understand that their role is to represent solely the members of their respective subgroups.”

Between the “one-sidedness of its terms and the fatal conflicts of interest” it was clear to the Court that “[c]lass counsel sold out the class.”  As a result, the Court not only rejected the settlement, but stated that the class representatives and class counsel must be replaced, and that the objectors should be reinstated as the class representatives.

Many valid settlements contain elements analogous to those in Eubanks (e.g., requiring class members to return a claim form to obtain benefits), but the facts in Eubanks are extreme.  Thus it is uncertain how Eubanks may inform district courts’ scrutiny of class action settlements.  At a minimum, however, Eubanks provides a warning that settlement terms cannot be one sided, and that a district court must do more than a rubber stamp class action settlements.

California Supreme Court Pounds Another Nail into the Coffin of “Trial by Formula” in Class Actions

Posted in Class Action Trends, Employment

Editor’s Note: This blog post was originally posted on It is reproduced with permissions.

The California Supreme Court issued its long-awaited decision in Duran v. U.S. Bank National Association yesterday, addressing the use of statistical sampling as a way of evaluating aggregate liability and damages in a class action. Although Duran is a wage and hour case, its analysis is pertinent to the use of statistical evidence in a variety of other class action contexts.

In the opening line of his majority opinion, Justice Corrigan referred to Duran “an exceedingly rare beast” because it was a wage and hour class action that had proceeded all the way through trial to verdict.  In the trial court, the plaintiff had presented testimony from statistician Richard Drogin, who had also notably served as an expert for the plaintiffs in Walmart Stores Inc. v. Dukes.  Drogin proposed a random sampling analysis that purported to estimate the percentage of the defendant’s employees that had been misclassified for purposes of entitlement to overtime pay.  The trial court did not rely on Drogin’s analysis but instead came up with its own sampling approach, which involved pulling the names of 20 class members, hearing testimony from these witnesses along with the named plaintiffs, and then extrapolating the court’s factual findings across the entire class in order to determine the defendant’s liability.

The supreme court affirmed a decision by the Court of Appeal holding that this sampling approach violated due process and was a manifest abuse of discretion.  Generally, there were two independent reasons for the supreme court’s conclusion: 1) the use of random sampling deprived the defendant of the opportunity to present individualized evidence supporting its defenses to the claims; and 2) the sampling method adopted by the court was inherently flawed and unreliable.

Without categorically rejecting the use of statistics as a tool in managing class action litigation, the supreme court identified numerous conceptual limitations on its use.  First, “[s]tatistical methods cannot entirely substitute for common proof . . . .  There must be some glue that binds class members together apart from statistical evidence.”  So, while statistics may serve as circumstantial evidence to support a common issue–such as the existence of centralized policy or practice, they may not be used as a substitute for establishing commonality or for avoiding individualized determination of individual issues–such as by generalizing effects of a given policy or practice on large groups of claimants where the effects vary in actuality.

Second, a trial court cannot utilize statistical evidence in a way that prevents the individual adjudication of individual defenses.  Although courts are encouraged to develop innovative procedures in managing individual issues, a court cannot ignore individual issues altogether or prevent them from being decided on an individual basis.

Third, if statistical evidence is to be used as part of a litigation plan for managing complex class action, the methods to be employed should be presented, evaluated, and scrutinized at the class certification stage.  The court should not simply assume that statistical methods will permit class treatment and certify the class based on this hypothetical possibility.

Fourth, the court must ensure that the statistical method to be employed has to be reliable, based on statistically valid data, and not prone to a high margin of error.  In other words, junk science or ad hoc, rough justice are not enough.

The Duran opinion is worthy of careful study for anyone considering the use of statistics in class certification proceedings, both in the wage and hour context and in class actions more generally.  It also provides a colorful illustration of the due process and manageability problems posed by the “trial by formula” approach to class actions that the United States Supreme Court criticized in Dukes.

ABA Regional CLE Conference on Class Actions – June 19, 2014 in San Francisco

Posted in Class Action Trends

In case you missed it, the ABA’s Class Actions and Derivatives Suits, Consumer Litigation, and Mass Torts Committees are hosting a Regional CLE conference on June 19th at the University of San Francisco Law School in San Francisco entitled “Who’s in Charge Here?: The Role of Lawyers, Clients, Insurers, and Judges in Class Actions and Mass Tort Litigation.” Paul Karlsgodt, BakerHostetler’s national Class Action Defense Team practice chair and blog contributor, will be co-chairing the conference, and we highly recommend attending. Click here to register or for more information.

Clapper Again Stymies Data Breach Class Action

Posted in Class Action Trends, Class Actions Privacy, Data Breach

Editor’s Note: This blog post is a joint submission with BakerHostetler’s Data Privacy Monitor blog.

The U.S. Supreme Court’s decision in Clapper v. Amnesty International USA again has been relied on by a federal district court to hold that the “mere loss of data” in a data breach case does not constitute an injury sufficient to confer standing.  In re: Science Applications International Corp. (SAIC) Backup Tape Data Theft Litigation, U.S. District Court for the District of Columbia, Misc. Action No. 12-347 (JEB) MDL 2360 (May 9, 2014).

In SAIC, tapes containing personal and medical information for 4.7 million members of the U.S. military and their families, along with the car’s stereo and GPS, were stolen from the parked car of an SAIC employee.  SAIC is an information technology company that was handling data for TRICARE, a government agency that provides insurance coverage and health care to active-duty service members and their families.  The breach victims sued TRICARE and SAIC, among others, asserting 20 causes of action, including increased risk of identity theft; expenses related to mitigating the risk of identity theft, loss of privacy; loss of value of personal and medical information; loss of value of insurance premiums; SAIC’s failure to meet the requisite standard for data security; the lost right to truthful information; statutory or liquidated damages; and, for at least one plaintiff, actual identity theft.  The court granted the Defendants’ motions to dismiss the claims of almost all of the Plaintiffs on the ground that they lacked standing.

The court noted that the case “presents thorny standing issues regarding when, exactly, the loss or theft of something as abstract as data becomes a concrete injury.”  The Plaintiffs claimed that they are 9.5 times more likely than the average person to become victims of identity theft, and that their increased risk of harm is sufficient to confer standing.  Citing Clapper, the court disagreed, stating that the “degree by with the risk of harm has increased is irrelevant — instead, the question is whether the harm is certainly impending.”

To illustrate that the likelihood of harm to any individual Plaintiff was “entirely speculative,” the court set forth the following chain of events that would have to occur for an injury to take place:

First, the thief would have to recognize the tapes for what they were, instead of merely a minor addition to the GPS and stereo haul.  Data tapes, after all, are not something that an average computer user often encounters.  The reader, for example, may not even be aware that some companies still use tapes — as opposed to hard drives, servers, or even CDs — to back up their data. . . . Then the criminal would have to find a tape reader and attach it to her computer.  Next, she would need to acquire software to upload the data from the tapes onto a computer — otherwise, tapes have to be slowly spooled through like cassettes for data to be read.  After that, portions of the data that are encrypted would have to be deciphered. . . . Once the data was fully unencrypted, the crook would then need to acquire a familiarity with TRICARE’s database format, which might require another round of special software.  Finally, the larcenist would have to either misuse a particular Plaintiff’s name and social security number (out of 4.7 million TRICARE customers) or sell that Plaintiff’s data to a willing buyer who would then abuse it. . . .

At this point, we do not know who [the thief] was, how much she knows about computers, or what she has done with the tapes.  The tapes could be uploaded onto her computer and fully deciphered, or they could be lying in a landfill. . . . (citations and emphasis omitted).

In addition, the court ruled that costs incurred to prevent future injury did not create standing, even though it was not unreasonable to make those expenditures.  Consequently, the court ruled that the vast majority of plaintiffs lacked standing.

The court also rejected the invasion of privacy claim of most Plaintiffs because they did not alleged that their personal information had been viewed or exposed in a way that would facilitate easy, imminent access.  The Plaintiffs’ claim for reduced value of personal and medical information claim also failed since they did not contend that they themselves intended to sell that information on the cyber black market.  Plaintiffs’ claim for reduced value of their insurance premiums was dismissed because they did not allege facts that show that the market value of their insurance coverage, including security services, was somehow less than what they paid.

The Plaintiffs’ claims based on alleged legal violations were also found to be deficient: “Standing . . . does not merely require a showing that the law has been violated, or that a statute will reward litigants in general upon a showing of a violation.  Rather, standing demands some form of injury — some showing that the legal violation harmed you in particular, and that you are therefore an appropriate advocate in the federal courts.”  The court also dismissed the Plaintiffs’ claim based on deprivation of their “right to truthful information about the security of their PII/PHI,” holding that no independent harm has flowed from that so-called deprivation.

Although the court held that two Plaintiffs had adequately alleged harm that was plausibly linked to the breach, the court refused to presume that the remaining Plaintiffs’ data likewise would be misused.  The car break-in was a “low tech, garden-variety” theft and “hardly a black-ops caper,” unlike the sophisticated and malicious intrusions at issue in some other cases.

As we’ve previously reported, standing has been found lacking in almost every post-Clapper data breach case where there were no allegations of misuse of the plaintiffs’ data.  The SAIC court’s recitation of the steps that the data thief would have to take to access and misuse the stolen data clearly illustrates the speculative nature of most data breach injury claims.


Wall Street Banks, Stock Exchanges and High Frequency Trading Firms Hit With Securities Fraud Class Action

Posted in Class Action Trends, Securities

Last month, the City of Providence, Rhode Island filed a first-of-its-kind class action against Wall Street banks, securities exchanges and brokerage firms over alleged violations of federal securities laws stemming from the defendants’ involvement in so-called “high-frequency trading” (HFT).  HFT has been subject of heightened focus since numerous regulators launched investigations into the practice, which some claim distorts stock market prices at the expense of the investing public.  In simplified terms, HFT is when traders utilize complex computer algorithms to move in and out of securities positions within fractions of a second.  As Michael Lewis explains in Flash Boys: A Wall Street Revolt, there are dozens of venues for trading stock (including public exchanges and private trading venues known as “dark pools”), which are situated at varying physical distances away from the originating order.  An order to buy or sell might therefore take longer (albeit milliseconds or even microseconds) to reach one exchange versus another.  According to Lewis and the City of Providence, HFT firms pay the exchanges for the right to place their computer servers as close to the exchanges’ matching engines as possible, giving them “nearly instantaneous” access to key data about the investor’s order, including its intention to buy or sell, its price sensitivity or margin requirements.  With that data in hand, HFT firms then employ complex computer code to race to other exchanges, transact, and then fulfill the investor’s order.  This not only prevents the investor from obtaining the best price available when it sent the order, but also causes the market to move—in the blink of an eye—in a direction that causes the damage to the investor.

In the complaint, Providence represents a purported class of public investors who traded stock in U.S. exchanges or dark pools between April 18, 2009 and the present and suffered loss because of HFT.  The suit features an ambitious roster of defendants, including every SEC-registered national stock exchange (the Exchange Defendants), the 14 largest U.S. brokerage firms (the Brokerage Defendants) and 12 high frequency trading companies (the HFT Defendants).  Plaintiffs allege the Brokerage Defendants and HFT Defendants represent a “class” of defendants comprising “hundreds” of unidentified brokers and traders allegedly complicit in the scheme.

The complaint tracks the history of securities trading since the 1970’s, depicting a “bold new world” in which sophisticated traders play “cat-and-mouse games” to gain clues about the investing public’s trading intentions and exploit that information to gain a market advantage.  According to the plaintiffs, a 2007 SEC regulation called “Reg NMS” (or “national market system”)—which requires exchanges and brokers to execute customers’ orders at the most competitive price posted at any U.S. trading venue that displayed price quotes—may be partly to blame.  While Reg NMS was designed to promote investor confidence by ensuring customers received the best possible price, it spurred the proliferation of new exchanges, all competing to entice new customer order flow by offering that best price.  This fostered fragmentation of the stock market, boosting HFT firms’ ability to exploit latency times and jump out ahead of the investing public.  Because of this, plaintiffs say, HFT has exploded—it accounts for 73% of all equity bids and orders volume on the market today.

In particular, plaintiffs allege the defendants engaged in the following manipulative HFT practices:

  • “electronic front-running” – where, in exchange for kickback payments, the HFT Defendants are provided early notice of investors’ intentions to transact by being shown initial bids and offers placed on exchanges and other trading venues by their brokers, and then race those bona fide securities investors to the other securities exchanges, transact in the desired securities at better prices, and then go back and transact with the unwitting initial investors to their financial detriment;
  •  “rebate arbitrage” – where the HFT and Brokerage Firm Defendants obtain kickback payments from the securities exchanges without providing the liquidity that the kickback scheme was purportedly designed to entice;
  • “slow-market (or latency) arbitrage” – where the HFT Defendants are shown changes in the prices of a stock on one exchange, and pick off orders sitting on other exchanges, before those exchanges are able to reach and replace their own bid/offer quotes accordingly, which practices are repeated to generate billions of dollars more a year in illicit profits than front-running and rebate arbitrage combined;
  • “spoofing” – where the HFT Defendants send out orders with corresponding cancellations, often at the opening or closing of the stock market, in order to manipulate the market price of a security and/or induce a particular market transaction; and
  • “layering” – where the HFT Defendants send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep in order to take advantage of the market’s reaction to the layering of orders.

While the HFT Defendants and the Brokerage Defendants allegedly profited to the tune of billions of dollars by trading against investors using their informational advantage, the Brokerage Defendants also allegedly received kickbacks for directing their customers’ orders to certain exchanges and dark pools the Brokerage Defendants knew were “rigged” due to “informational asymmetries” caused by HFT.  The Exchange Defendants also allegedly received payments for allowing the HFT Defendants to place their servers in close proximity to the exchanges’ matching engines (a practice known as “co-location”), giving the HFT Defendants a sneak preview of key customer trading data.

The suit includes three substantive counts: (1) Violation of §10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder (against all Defendants); (2) Violation of §6(b) of the Securities Exchange Act (against the Exchange Defendants); and (3) Violation of 20A of the Securities Exchange Act (against the Brokerage Firm Defendants and the HFT Defendants).

Plaintiffs will face a number of legal obstacles to victory, in particular, the definitional problems surrounding their depiction of the Brokerage and HFT Defendants as a “defendant class.”  Plaintiffs appear to have lumped the Brokerage and HFT Defendants together in alleging they all engaged in similar illicit conduct, yet fail to allege specific fraudulent conduct by any particular defendant.  As one writer has pointed out, “Plaintiffs will struggle to overcome some obvious problems with the seeming shapelessness of the defendant class and the problems associated with having class representatives that did not volunteer for the role.”

Plaintiffs may have a particularly hard time proceeding under §6(b), which does not appear to create a private right of action.  Section 6(b) requires all nationally-registered exchanges to enact rules designed to promote the Exchange Act’s purposes—to prevent fraudulent and manipulative practices—but does not specify whom may enforce violations of this requirement.  The plaintiffs allege they are the “direct intended beneficiaries of” and collectedly relied on §6, perhaps foreshadowing their argument that §6 contemplates a private right of action.

Plaintiffs will also have to overcome the heightened pleading standards of the Private Securities Litigation Reform Act, which requires plaintiffs to allege sufficient facts to create a “strong inference” of fraudulent intent against each defendant.  That is no easy task considering the laundry list of defendants included in the suit.  Also, proving the defendants engaged in HFT is not the same as proving they committed fraud; as some have written, HFT is not always predatory and may even benefit the market in unseen ways.

Expect the HFT debate to continue gaining traction in the months ahead.  The New York Stock Exchange, for its part, has already paid millions to the SEC to settle charges of HFT abuse.