Consumer Fraud Class Actions: A Status Report

Thursday, February 20, 2014 - 17:11

The Editor interviews Harold P. Weinberger and Norman C. Simon, Partners, Kramer Levin Naftalis & Frankel LLP.

Editor: What trends are you seeing in consumer fraud class action cases?

Weinberger:  We are seeing more of them, and more are being brought in federal court. It could be that plaintiffs are turning to the consumer fraud area because Congress has made it more difficult to bring securities class actions.

An important source of likely candidates for class actions is the many false advertising decisions of the National Advertising Division of the Better Business Bureau.  Even though those decisions are not the result of a judicial proceeding, they give plaintiffs’ lawyers a roadmap.  A big trend in both the food and the cosmetic areas are cases involving the advertising of products as natural or organic. Food, drugs and consumer products generally have been a focal point for many of the class action filings we are seeing.

Editor:  How important is it to contest consumer fraud class actions at or before the certification stage?

Weinberger: Contesting class certification is critical. There are a variety of arguments that can be made. One is illustrated in the leading case of Mazza v. American Honda, a class action under California’s consumer protection laws decided by the Ninth Circuit. At issue was whether a nationwide class could be certified under the California consumer protection law. The plaintiffs argued that they could apply the law where a defendant is headquartered, so if a defendant is based in California, they can apply California law regardless of where the plaintiffs reside.

Mazza held that the court must first determine whether there are any differences between the California law and that of other states where plaintiffs are located. The court found many. Some states require reliance and some don’t. Some states have presumptions of materiality and some don’t. Some states allow jury trials and some don’t. And states vary as to the nature of the damages.

On this basis, the court found that the law applicable to each plaintiff’s claim is the law of the jurisdiction where he or she resides or bought the product and not where the defendant resides. This means in a nationwide class, the law of 50 different states would apply. Therefore, the court in Mazza found that, unless you can put forward a plan for dealing with that, you can’t satisfy the requirement in Rule 23 that common questions of law and fact predominate.

The holding in Mazza has been echoed in courts elsewhere in the country. We’ve seen it in New Jersey, New York and many other jurisdictions. It’s proving to be very persuasive – and makes it very difficult, if not impossible, to certify a nationwide class.

What we are seeing in the cases that we defend is that Mazza forces plaintiffs to try to certify subclasses made up of plaintiffs from states with substantially similar consumer protection laws or alternatively to seek to certify only statewide classes. We have one case in New York where the plaintiff is seeking only to certify a statewide class. This is a recognition of the obstacle that Mazza and its progeny have put in the path of plaintiffs seeking to certify nationwide classes.

Another development that may limit class actions is the recent decision of the Third Circuit in Carrera v. Bayer Corporation. This case requires that members of the class be ascertainable in the sense that the purported method for determining who is in the class is reliable and administratively feasible and that permitting consumers to submit affidavits is not appropriate. When you’re dealing with food, over-the-counter drugs or cosmetic products, it’s a big issue because people don’t keep receipts, they don’t have proof of purchase, and they often have no recollection of where they bought a particular product. You can sense from these developments that some judges are looking for ways to stem the tide of consumer fraud class actions.

Editor: Is discovery available at the class certification stage?

Weinberger: There are issues that are addressed in the class certification stage, and that varies from jurisdiction to jurisdiction and court to court. Plaintiffs often want discovery in aid of their class certification motion because there are certain things they have to prove. We just had a case in California in which we agreed in connection with a motion for class certification to give the plaintiffs very limited discovery on certain agreed-upon topics without doing a full e-discovery search.

Simon: From the defense perspective, it is desirable to try to minimize the costs by eliminating e-discovery, or at least limiting it to the class certification question. In these kinds of cases, the discovery is very one-sided – the burden is great on the defendant and very modest on the plaintiffs. Courts sometimes will bifurcate class certification and merits discovery. If a defendant can successfully persuade a court to so limit discovery, it may avoid exorbitant e-discovery costs because the class certification question is the whole ball game. If the motion is lost, as a practical matter that is likely to end the case before merits discovery because an individual plaintiff is unlikely to continue a lawsuit over the few dollars and cents at issue. On the other hand, if class certification is granted, that may act as a catalyst for a defendant to entertain settlement because of the potentially significant downside risk.

Editor: How important is it to show reliance on the disputed claim?  

Weinberger: Courts in California and elsewhere have held that, even if an individually named class action plaintiff has to prove that he or she relied on the claim upon which the case is based, unnamed class members do not if the claim is material and was widespread. This means that, in those states, you can’t defeat a class action certification by arguing that individualized proof of reliance is required. Where reliance by each class member is required, it is a potent tool.

In the Supreme Court’s decision in the Comcast antitrust case, the Court found that in order to get class certification you have to demonstrate that there is a class-wide method of proving injury that’s consistent with the theory of liability or of damage articulated in the complaint. Many of the same courts that hold that a class action plaintiff may not have to show reliance require that he or she suffered injury and have denied class certification on the ground that injury cannot be proven on a class-wide basis. That’s an avenue defendants will be exploring.

Editor: Are class actions triggered by state consumer protection legislation?

Simon: Yes, and every state has them. Some are interpreted broadly, some are not. California is probably the favorite place for plaintiffs. New Jersey has been popular also. A troubling phenomenon is plaintiffs’ lawyers piggy backing on false advertising decisions rendered by the National Advertising Division (NAD) – a self-regulatory body of the Better Business Bureau – as well as Lanham Act opinions rendered by courts, to bring class actions under state consumer protection laws.  While some courts in California and New Jersey recently have held that NAD decisions are insufficient to support a plaintiffs’ burden of proving that an advertising claim is false – and, in any event, such decisions should not be admissible evidence – they nevertheless can serve as roadmaps for class actions commenced under state consumer protection laws.

Editor: Are any of these initiated by the attorney general or other officials, like the official responsible for consumer protection?

Simon: They can be. However, in most cases those officials bring enforcement proceedings. These are not as threatening to companies as are cases where millions of people have purchased their product and lawyers are looking for a big payday. Some of the claims in consumer fraud class actions are so farfetched that they are unlikely to be brought by enforcement agencies.

Editor: How did the Class Action Fairness Act (CAFA) affect the cases you handle?

Weinberger: Before CAFA, some jurisdictions were havens for class actions. This is because national companies are subject to suit in any jurisdiction. This meant that you could find yourself before state court judges known for interpreting state law in a manner favorable to plaintiffs. You couldn’t remove these cases to a federal court because the federal requirements for jurisdiction were not met. These cases did not usually involve federal questions. All the plaintiffs named and unnamed were not diverse from the defendant. And, it would be unlikely that the individual claims of the plaintiffs would exceed $75,000.

CAFA was seen as a way of getting these cases into federal court where a more uniform jurisprudence would be applied to them.

Editor: Are there any lights at the end of the tunnel for class action defendants?

Weinberger: There are a number of lights at the end of the tunnel – although their impact remains to be seen. One is that the principle enunciated in Carrera would eliminate classes of plaintiffs who don’t normally keep receipts for small purchases. If Carrera starts getting adopted by other circuits, that would put a huge crimp in the plaintiff’s bar because they bring consumer fraud cases to get classes certified. I’m venturing a guess that the number of consumer fraud class action cases that get filed for these kinds of products in New Jersey, Pennsylvania and Delaware is going to be substantially reduced because of Carrera.

Another light is the potential effect of Comcast on the need to show injury on a class-wide basis. A final light is that differences in state law on which the outcome in Mazza turned have reduced the ability to form a nationwide class, although some in the plaintiff’s bar seem to be willing to move forward with state-wide classes or groups of states notwithstanding the inability to certify nationwide classes.

Given the results in these cases and assuming they are followed by other courts, if we look down the road five or ten years from now, consumer fraud class actions may not be anywhere near as prevalent as they are today.

Harold P. Weinberger heads Kramer Levin's advertising group, and is a Fellow of the American College of Trial Lawyers. He has been lead counsel in the litigation of many false advertising cases under Section 43(a) of the Lanham Act, representing both plaintiffs and defendants, in the defense of class actions commenced under consumer fraud statutes, and in other complex intellectual property and commercial litigations and arbitrations. He has also argued appeals in six different federal circuits and the New York Court of Appeals. Mr. Weinberger has been recognized as one of The Best Lawyers in America and is listed in Chambers USA, Legal 500 US, Lawdragon 3000 and Benchmark Litigation. He has been ranked among the top 100 New York Super Lawyers in each of the last five years.

Norman C. Simon has extensive experience litigating false advertising cases under the Lanham Act, as well as consumer fraud and false advertising class actions and other complex commercial litigations. Mr. Simon also regularly represents clients in challenges before the National Advertising Division (NAD), and counsels clients on prospective advertising claims. Legal 500 US – which has characterized Kramer Levin as “‘one of the best’ advertising litigation firms” – has recognized Mr. Simon as a “leading lawyer” in the field for several years. He also has been recognized by Chambers USA and New York Super Lawyers.


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