Tried And True Methods Of Defeating Consumer Class Actions

Monday, May 1, 2006 - 00:00

If your company deals with the public, it may very well find itself named as a defendant in a class action lawsuit. No, we're not talking about a class action involving federal securities law violations. While securities class action lawsuits often receive the lion's share of attention by the press and businesses, a major study conducted with regard to class action lawsuits determined that class actions concerning consumers actually comprise the largest number of class action disputes. And, there is no slow-down in sight.

Consumer class actions generally allege violations of statewide consumer protection statutes. They target deceptive advertisements, labels, product packaging and/or trade practices. Any method of selling or handling a product is fair game. Lawsuits have been filed on grounds that: a cosmetics product stated that it was "anti-aging;" an online video rental service claimed to be "unlimited;" and a bottled water professed to be from a spring. Indeed, a cigarette manufacturer that labeled its cigarettes as "light" was hit with a $10.1 billion class action verdict for allegedly violating Illinois' Consumer Fraud and Deceptive Business Practices Act.

A critical juncture in a consumer fraud class action dispute is the class certification stage - when, a court is asked to determine whether all the prerequisites for certification have been satisfied. Class certification generally does not directly involve the merits of the putative class' claims. During this phase, a court only decides whether the action should proceed on a class basis or be limited to the person who brought the lawsuit. Significantly limiting or defeating class certification often results in favorable settlements for defendants.

Consumer class actions can present billion dollar problems for companies. Such lawsuits thus should be strongly challenged at every step. This article outlines some "keys" to successfully defending a consumer class action lawsuit.

1. Getting Out Of A Bad Court

Defendants should take a long, hard look at the court in which they are sued. Some state courts - sometimes referred to as "judicial hellholes" - are renown for their generosity to class action plaintiffs. By contrast, federal courts often apply the prerequisites to proving a consumer class action more rigorously. Where possible, defendants should consider removing their case to federal court.

The Class Action Fairness Act of 2005 (the "Act") makes it easier to do so. First, the Act now permits a federal court to exercise jurisdiction if the amount in controversy exceeds, in the aggregate, $5 million. Previously, the court needed to look at the individual losses of each class member - which usually were small. Second, the Act permits removal of a case from state court to federal court as long as at least one defendant is a citizen of a state that is different from the plaintiff's state; this is known as "minimal diversity." Before the Act, "complete diversity" was required, and removal was not permitted if any one defendant and any one plaintiff were citizens of the same state.

Key: Strongly consider removing to federal court.

2. Defeating A Nationwide Class

Many consumer class action lawsuits seek to represent everyone in the United States purportedly injured. Such classes present companies with exponentially higher exposure than those limited to particular states. Certification of nationwide classes can be readily defeated by establishing that the applicable laws vary between and among the states.

Consumer statutes often are found to be limited in their geographic reach to encompass only those activities that occur within their borders. These statutes are seldom uniform and vary as to statutes of limitation, elements of proof, and who has standing to bring a claim. Some laws have unusual characteristics such as precluding recovery for any claimant who did not purchase the product or service "primarily for a personal, family or household purpose."

Key: Seek to defeat or limit the national class.

3. Who Is Your Class Plaintiff?

Every class action must be brought by a class representative or "lead plaintiff." A person whose background or character is dubious may be rendered unfit to act as the lead plaintiff. Not surprisingly, a lead plaintiff, was disqualified in a securities class action because he had been convicted of securities fraud - and had failed to disclose the conviction until the day before his deposition.

When scrutinizing a class plaintiff, some areas to investigate include:


  • Is the person a serial litigant? In some cases, entire families have established "cottage industries" based on consumer fraud class actions.

  • Has the person ever been accused, or been convicted, of a crime? If so, what was the nature of the offense? Perjury, theft or ethical violations are particularly meaningful and may disqualify a person from acting as lead plaintiff.

  • What is the relationship between the plaintiff and the attorney bringing the case? Often there are connections.

  • Was the claim a "set up" just for purposes of instituting a lawsuit?
  • Key: Try to knock out your lead plaintiff.

    4. Are The Facts Sufficiently Common?

    A basic tenet of a class action is that the claims of all class members must be sufficiently common. Consumer protection lawsuits often raise a variety of highly individualized fact patterns. Accordingly, the particular circumstances surrounding each class member's claim must be analyzed thoroughly.

    Where the representations underlying the alleged deception are oral, individualized issues often abound. Virtually every federal Circuit Court of Appeals to consider the issue has concluded that oral misrepresentations are presumptively individualized. A court refused to certify a class of consumers who purchased life insurance based on oral presentations by its salespeople on the grounds that the court would be required to conduct an individual inquiry into each salesperson's presentation with each class member to ascertain whether there was an actionable misrepresentation. Likewise, certification was denied to a class of consumers who alleged that a well known income tax preparation service induced them to take loans in advance of tax refunds without disclosing certain interest rate information; since the allegations were based upon oral communications with the tax preparers' salespeople, individualized proof of each class member would be required, and certification denied.

    Allegedly deceptive advertisements may also be challenged on these grounds. A court may need to examine whether each class member actually read or heard the same advertisement - and if so, what each understood from the actionable language. If a plaintiff cannot demonstrate that there was uniformity in the content of the writings at issue, certification will be denied.

    Key: Identify all variations in the facts surrounding the alleged misrepresentation that can defeat commonality .

    5. What Caused The Injuries Alleged?

    Each class member must show that the misrepresentation at issue actually "caused" the injuries alleged; class members must show that "but-for" the allegedly deceptive act, there would not have been any injury. This often leads to individualized issues of fact.

    A class of consumers who had purchased internet service based on an allegedly deceptive advertisement was decertified because individual trials would have been required to determine whether any Internet disruptions experienced by class members were caused by the service provider, or caused by other factors, such as the class member's own computer or network.

    Causation may pose an even greater obstacle to class certification when reliance is an element of a claim. Various consumer protection statutes require proof that each class member in fact relied upon the alleged misrepresentation. Indeed, a class can be opposed on the grounds that numerous other factors influenced a consumer's decision to purchase a product. A class of consumers alleging deception in the fat and caloric content of "Pirate Booty," a popular kids' snack, recently was decertified because there was no indication that the class members purchased the product in reliance on the advertised fat and caloric content. A class of disgruntled New York Nets basketball season ticket holders was decertified because it could not be established that all ticket holders purchased their tickets based on an advertisement that "Dr. J" (Julius Erving) would play basketball for the Nets. He, in fact, was traded mid-season to the Philadelphia 76ers.

    Key: Search out ways in which class members' decisions were influenced by factors other than the alleged deception.

    6. Investigate Safe Harbors

    Under a number of state consumer protection statutes, it is a complete defense to a consumer deception claim that the activities in question comply with a statute or regulation. This may be of particular assistance to industries that are subject to significant legislative oversight, such as the airline or telecommunications industries. To avail itself of this defense, a defendant must show that Congress intended to "preempt" this area of the law entirely and assume "primary jurisdiction" over issues within the area by creating a comprehensive federal scheme, which thereby precludes state legislation. A Court dismissed an action as preempted by federal law, where a plaintiff challenged the rates and level of service offered by a wireless telephone service provider, an area specifically reserved to federal regulation by the Federal Communications Commission.

    Key: Look to see if class claims are "preempted" by federal legislation.

    Conclusion

    There are numerous ways to defeat or limit a consumer class action. The class certification motion presents one significant opportunity. A thorough investigation can help "unlock" those opportunities.

    Steven Cooper is Co-Chair of Anderson Kill & Olick's Commercial Litigation Department, and he focuses on fraud, consumer protection, trade secrets and securities cases. He has been a Shareholder in the New York office of Anderson Kill & Olick, P.C. since 1985. Todd D. Robichaud is a member of the Business Litigation Group, focusing his practice primarily on complex commercial litigation and business disputes, with a particular emphasis on financial, securities, telecommunications and class action disputes.

    Please email the authors at scooper@andersonkill.com or trobichaud@andersonkill.com with questions about this article.