Opinion

Alison Frankel

Posner on class actions: Minuscule damages shouldn’t doom cases

Alison Frankel
Sep 11, 2013 20:20 UTC

Reading opinions by Judge Richard Posner of the 7th Circuit Court of Appeals is like jumping waves in a calm ocean. You bob along in the buoyancy of Posner’s ideas until you turn around to face shore and wonder how you drifted so far from where you started. So it is in an 11-page ruling Tuesday, addressing whether a class of ATM users may be certified to seek statutory damages under the Electronic Funds Transfer Act for a tiny defendant’s failure to post stickers notifying users of ATM fees. As you know, these are more turbulent waters than they first appear, roiled by uncertainty about constitutional standing and appropriate classwide relief. Posner’s prose nevertheless carries you along so forcefully that you don’t even notice until you’re done that he has deposited you in a land where all the rules are Posner-made.

Okay, I’m exaggerating. But once again, the iconoclastic appellate judge has issued an important opinion on consumer class actions that reflects his vision, as an economic rationalist, of the potential efficiencies of resolving hundreds or thousands of individual claims with a single proceeding. He did it last month when, on remand from the U.S. Supreme Court, he and two 7th Circuit colleagues recertified a class of Sears washing-machine purchasers for the purposes of determining whether Sears is liable for a design that supposedly results in a moldy odor. Sears has called the ruling “judicial fiat.” In the new opinion, Posner and his fellow 7th Circuit panelists Daniel Manion and Diane Wood urge trial judges to use common sense in deciding whether to certify a consumer class seeking statutory damages, focusing on realistic solutions and not hypothetical problems.

The case is another in the spate of class actions filed against banks that supposedly failed to comply with the ATM law’s requirement that they not only notify users of add-on charges with an on-screen alert after users have begun their transactions but also provide advance warning of fees on the ATM machine itself. (That requirement has since been dropped in an amendment to the law.) Congress called for individual damages of between $100 and $1,000, but also anticipated class actions in which total damages could amount to $500,000 or 1 percent of the defendant’s net worth, whichever is less. In the class action before Posner, a class brought claims against the ATM operator Kore, which owned ATMs in two Indianapolis bars frequented by college students. U.S. District Judge Jane Magnus-Stinson of Indianapolis first certified the class based on 2,800 transactions at the two ATMs but later changed her mind for two reasons. With maximum classwide damages of $10,000 because of Kore’s small net worth, she said, class members might be better off suing individually for at least $100. She was also concerned that potential class members couldn’t be properly notified about a $10,000 settlement because it would cost so much to figure out who they were based on banking records.

Class counsel at Travis & Calhoun and The Frasher Law Firm asked the 7th Circuit to review the decertification ruling, arguing that Magnus-Stinson’s reasoning would gut class actions based on consumer protection statutes, many of which are fashioned with similar caps on classwide damages. Kore’s lawyers at Metzger Rosta did not oppose the appeal and did not submit a brief in opposition. (They also did not return my call.) Posner grabbed the opportunity to “further the development of class action law regarding issues of notice in cases in which the potential damages per class member are very slight, and the suitability of class action treatment of such cases.”

His opinion first considered Judge Magnus-Stinson’s finding that class members might do better to sue on their own for statutory damages of $100. (Posner said it was improbable they could seek more because Kore charged a small ATM fee.) What lawyer would bring a suit for $100, even in the anticipation that the defendant would have to pay fees? No reasonable and competent lawyer, according to Posner, who also noted that lawyers have not brought individual actions seeking statutory damages for violations of the ATM law.

Freeh corruption report reveals a way forward for BP oil spill deal

Alison Frankel
Sep 10, 2013 22:08 UTC

I’m on record as a skeptic of BP’s doomsday predictions about the impact of ballooning claims in its settlement with alleged victims of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. I still don’t buy BP’s argument that future mass disaster defendants will shy away from group settlements because BP’s agreement was open to what the oil company contends is misinterpretation by claims administrator Patrick Juneau. Nor do I think the 5th Circuit Court of Appeals should permit BP to argue that the settlement it once asked U.S. District Judge Carl Barbier of New Orleans to approve should now be undone. BP is a sophisticated defendant ably represented by Kirkland & Ellis in the long negotiations that produced the settlement agreement proposed to Barbier in March 2012. The oil company says the deal has been warped by Barbier’s endorsement of Juneau’s overly expansive reading of the terms for business and economic losses. But it bargained hard for the language in the settlement agreement and should have to abide by the deal it struck.

Nevertheless, I’m troubled by the 98-page report on corruption within Juneau’s Claims Administration Office by former FBI director Louis Freeh. Anyone who believes in mass settlements should be. Freeh conducted a two-month investigation spurred by the resignation of a lawyer on Juneau’s staff. His report, released Friday, goes out of its way to exonerate Juneau, whom Freeh praised for setting a clear ethical tone and implementing written policies on ethics and conflicts. Freeh also recommended that the claims approval process continue under Juneau’s direction. That’s the good news for Juneau and the plaintiffs lawyers defending the settlement against BP’s attacks. The bad news: Freeh found copious evidence that corruption and conflicts have tarred some former members of Juneau’s staff.

The alleged wrongdoing detailed in the report ranges from venality – such as an attempt by Juneau’s self-described “general counsel,” Christine Reitano, to secure her husband a job with a company doing work for Juneau and an attempt by two other Juneau staff lawyers to capitalize on their work (and Juneau’s name) to win additional claims administration assignments for their outside company – all the way to the supposed crimes of fraud and money laundering. According to Freeh, a lawyer on Juneau’s staff named Lionel “Tiger” Sutton appears to have conspired with two outside lawyers, Jon Andry and Glen Lerner, to hide about $40,000 in referral fees routed through various vehicles from Andry and Lerner to Sutton. Freeh asserted that Sutton improperly “facilitated” claims by other clients of Andry and Lerner and expedited an $8 million award to one of Andry’s other law firms. The report also said that Sutton – who is married to Reitano – never bothered to tell Juneau that during his employment at the Claims Administration Office he was also receiving $10,000 a month as Lerner’s partner in a water reclamation company nor that Sutton is the co-owner of an oil rig services company with an active claim before Juneau’s staff. (Defense counsel for Sutton and Andry told the Associated Press that Freeh had made unfounded allegations about their clients.)

The unexpected afterlife of a Supreme Court wiretapping opinion

Alison Frankel
Sep 9, 2013 19:05 UTC

What do human rights advocates have in common with Barnes & Noble credit and debit card customers?

There’s no punchline response to that question (or at least none that I could think of). The answer instead lies in the U.S. Constitution’s strictures on who may bring a claim in federal court – and in the collateral consequences of the U.S. Supreme Court’s latest interpretation of standing, in a 2013 case called Clapper v. Amnesty International.

As you’ve probably guessed, that’s where the human rights advocates come in. After Congress passed amendments to the Foreign Intelligence Surveillance Act in 2008, the American Civil Liberties Union and outside lawyers from Proskauer Rose sued James Clapper, the Director of National Intelligence, on behalf of a group of U.S. lawyers, journalists and human rights groups who alleged that the FISA amendments violated their First and Fourth Amendment rights. The new law made it easier for the government to obtain permission to wiretap intelligence targets outside of the United States. The plaintiffs said their work required them to engage in international phone and Internet communications with likely targets of the stepped-up surveillance, and that the FISA amendments would permit the National Security Agency to access their communications illegally. They sought a declaration that the sweeping, warrantless wiretapping permitted under the new law was a breach of their constitutional free speech and privacy rights.

Sears, Whirlpool ask SCOTUS to eviscerate consumer class actions

Alison Frankel
Sep 6, 2013 20:57 UTC

Millions of American consumers over the last decade purchased high-end, front-loading washing machines with an unfortunate propensity to develop a moldy odor. The vast majority of those machines didn’t end up emitting the objectionable scent, or, at least, not noticeably enough to prompt their owners to register complaints with manufacturers and sellers of the machines. Nevertheless, lawyers representing washing machine buyers all over the country sued Whirlpool and other manufacturers in dozens of class actions claiming violations of various state consumer statutes. One of those consolidated cases, involving 10 class actions comprising about 4 million purchasers of Whirlpool washing machines, is one of the biggest class proceedings in American history. Consumers say – and appellate judges in two federal circuits agree – that they’re entitled to a classwide determination of whether the washing machines were defectively designed. Manufacturers, on the other hand, contend it’s impossible to lump consumers into classes because their individual experiences with the machines vary too widely.

When the U.S. Supreme Court opens its next term in October, one of the justices’ critical decisions will be whether to grant review of one or more of the three defective-washer cases that will be before them. Two of those cases have already attracted the high court’s attention. Last spring, it vacated class certification rulings from the 6th and 7th Circuit Courts of Appeal, asking the appellate judges to reconsider their rulings in light of the Supreme Court’s holding in Comcast v. Behrend. Over the summer, both the 6th and 7th Circuits recertified consumer classes, despite Comcast. Now, in an amicus brief in a third moldy-washer case before the Supreme Court, Sears and Whirlpool are arguing that under the reasoning the 6th and 7th Circuits used in those recertification opinions, there are virtually no limits on product liability class actions. Unless the justices take action, according to Sears and Whirlpool, American businesses face enormous new exposure to claims by consumers, including buyers who haven’t even suffered any ill effects.

The primary purpose of the amicus brief, which was filed last Friday by Mayer Brown as counsel of record for both Sears and Whirlpool, is to ask the Supreme Court to delay acting on a petition for certiorari by BSH Home Appliances, which sells Bosch and Siemens washers with an alleged mold problem similar to that of Whirlpool’s machines. In the BSH case, the 9th Circuit declined to review the trial court’s grant of certification to four statewide consumer classes. BSH’s lawyers at Jones Day want the Supreme Court to take up their case to determine not just whether a class can be certified without a classwide showing of injury but also whether the trial court erred in curtailing BSH’s challenge to the theories of the consumers’ experts. In their amicus brief, Sears and Whirlpool argue that their cases present a more appropriate vehicle for deciding the first (and more sweeping) question because they have detailed appellate records, including the 6th and 7th Circuit consideration of the impact of last spring’s Comcast ruling on consumer class certification.

Canada as litigation haven for U.S. shareholders? Not so fast…

Alison Frankel
Sep 5, 2013 19:38 UTC

The high point, at least so far, of securities class action filings in Canada was in 2011, when, according to NERA Economic Consulting, shareholder lawyers filed 15 new class actions. In 2012, the number of new filings declined to nine. And unless there’s a surge in class action complaints in the next few months, 2013 will show a steep decline even from last year’s total, NERA’s Bradley Heys told me Thursday.

That’s a very different trend from what we saw from 2005 through 2011, and it’s a bit of a surprise. Canadian securities class actions are, in certain critical ways, easier on investors than litigation in the United States. Shareholders are entitled to discovery earlier in Canadian cases than those in the United States, for instance. And petitioners (as plaintiffs are known in Canada) needn’t show that a defendant intended to deceive shareholders or that investors relied on the supposed misstatements. Non-Canadian investors, moreover, are welcome to bring global shareholder class actions in at least some Canadian provinces. In the peak year of 2011, when I reported on new class actions stemming from fraud at Sino-Forest, the Chinese lumber company traded on the Toronto stock exchange, I quoted a Canadian shareholders’ lawyer who called his country’s court system “a dream jurisdiction for securities class action lawyers.” (Sino-Forest investors went on to obtain a record $117 million settlement last December with Sino-Forest auditor Ernst & Young.)

So why the fall-off in filings? Heys told me NERA isn’t exactly sure, though one explanation could be that petitioners’ firms in Canada are simply too busy with the class actions they’ve already filed to bring new ones. In its report on 2012 class actions, the Canadian defense firm Osler, Hoskin & Harcourt discussed setbacks for class action petitioners at the pleading stage in cases in Ontario and British Columbia, including an Ontario appellate ruling that established a defense-friendly interpretation of the time bar for class actions.

SCOTUS’s next big privacy issue: Can police seize smartphones?

Alison Frankel
Sep 4, 2013 21:20 UTC

David Riley was already in deep trouble when the San Diego Police Department got hold of his Samsung smartphone in August 2009. Riley had been driving around the neighborhood in a Lexus with expired tags, and when he was pulled over police discovered that his license had been suspended. They searched his car and found guns hidden under the hood. Riley was arrested for carrying concealed and loaded weapons.

But it was the smartphone that sank him. At the arrest site, police scrolled through Riley’s text messages and contacts, finding what they considered to be indications that Riley was a member of the Bloods gang. Hours later, when he was under interrogation at the police station, a gang expert conducted a second search of Riley’s phone. He found photos and videos that, according to police, tied Riley to a gang-related drive-by shooting. Despite defense arguments that the smartphone seizure violated Fourth Amendment strictures on warrantless searches, prosecutors later used a photo and videos taken from Riley’s phone at his trial, which ended with his conviction for shooting at an occupied vehicle and two other charges. And because the smartphone supposedly linked Riley to gang activity, he was subject to an enhanced sentence. Instead of a maximum of seven years, he was sentenced to a prison term of 15 years to life.

The California Supreme Court declined to hear Riley’s Fourth Amendment appeal earlier this year, presumably because the state high court had already determined, in a 2011 case called Diaz v. California, that police may conduct warrantless searches of cellphones when the phones are seized from a person under arrest. On July 30, Riley’s lawyers at Stanford’s Supreme Court Litigation Clinic and Goldstein & Russell petitioned the U.S. Supreme Court to take his case. “This is the leading privacy issue, the next big technology and Fourth Amendment issue everyone is watching,” said Riley’s lead appellate counsel, Jeffrey Fisher of Stanford. “Now it has come to a crescendo.”

BP plays Twister in latest Deepwater Horizon appellate brief

Alison Frankel
Sep 3, 2013 20:20 UTC

Last year, when BP agreed to a historic multibillion-dollar class action settlement with people and businesses harmed by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the company pledged to defend the deal against objections and appeals. As is customary, lawyers for the claimants actually filed the motion to certify the settlement class, but BP told the court it fully supported the settlement agreement. The company and class counsel submitted joint expert declarations attesting to the fairness of the proposed deal, including a jointly filed report by Columbia Law School professor John Coffee, who said that although he’s skeptical of broad mass tort class actions, the agreement in this case did such a good job of defining class membership that the settlement class should be certified. When U.S. District Judge Carl Barbier of New Orleans certified the settlement class in December 2012, the case seemed to be on a typical track for a mass tort, with both sides benefiting from use of the class action vehicle. Defendants settle these cases because they want the certainty that comes from a classwide release of claims. They can’t get classwide releases without class certification.

But on Friday, BP swerved drastically off-course, filing a startling brief at the 5th Circuit Court of Appeals in a case first brought by objectors to the class action settlement. Unless the 5th Circuit undoes the trial court’s interpretation of settlement terms, BP now argues, class certification cannot stand. The oil company contends that the class is fatally flawed under both the rules for federal class actions and the U.S. Supreme Court’s 2013 holding in Comcast v. Behrend because the claims administrator’s supposedly erroneous reading of deal terms has permitted improper claims by uninjured businesses alongside legitimate claims by injured class members. “Federal class action rules,” the company said in an email statement, “do not permit class action settlements where such conflicts exist.”

BP, in other words, is doing something apparently unprecedented in class action history: siding with objectors in an attempt to scotch its own deal. That’s a contorted position, one that New York University law professor Samuel Issacharoff – who, admittedly, represents class counsel in a BP appeal at the 5th Circuit – said BP may not even have the right to assert because the company didn’t object to class certification at the trial court level and didn’t appeal Judge Barbier’s class certification ruling. BP’s brief is all the more head-scratching because, according to class counsel, even if BP and the objectors succeed in overturning class certification, the settlement agreement requires the oil company to still pay claims already in the pipeline.

U.S. criminal laws don’t apply to conduct abroad: 2nd Circuit

Alison Frankel
Aug 30, 2013 19:11 UTC

Attention, American fraudsters! If you restrict your criminal activities to conduct outside of the United States, you’re safe from prosecution under U.S. laws.

That’s not exactly how a three-judge panel of the 2nd Circuit Court of Appeals worded its decision Friday in U.S. v. Alberto Vilar and Gary Tanaka, but it’s the effective result of the appellate court’s finding that criminal statutes – in particular, criminal securities fraud laws – don’t extend overseas. The opinion noted that the 2nd Circuit has long recognized a presumption against the extraterritorial application of U.S. criminal laws. But make no mistake, the Vilar ruling is a major interpretation of what the court acknowledged to be an open question after the U.S. Supreme Court’s 2010 admonition against overextending the scope of U.S. laws in Morrison v. National Australia Bank. Namely, does Morrison apply to criminal as well as civil laws? The 2nd Circuit panel – Judges Jon Newman, Jose Cabranes and Chester Straub – could not have answered the question more decisively. “The general rule,” wrote Cabranes, “is that the presumption against extraterritoriality applies to criminal statutes.”

That reasoning could result in the dismissal of some counts of the government’s indictment of onetime SAC Capital trader Mathew Martoma, whose lawyers at Goodwin Procter argued in a brief filed in June that Morrison precludes charges based on trading in the American Depository Receipts of Elan, a company whose stock trades on Irish and British exchanges. The intersection of Morrison and fraud prosecution is also at issue in a 2nd Circuit appeal by former Sky Capital executives Ross Mandell and Andrew Harrington, who were convicted of defrauding mostly British investors in London-traded securities.

No circuit split on charity-only settlements: Facebook, Public Citizen

Alison Frankel
Aug 29, 2013 21:10 UTC

In 2011, after U.S. District Judge Richard Seeborg approved the $9.5 million settlement of a class action accusing Facebook of violating its users’ privacy through a since-dismantled program that disclosed their online purchases to their friends, the public interest group Public Citizen appealed Seeborg’s ruling to the 9th Circuit Court of Appeals. On behalf of an objecting class member, Public Citizen told the 9th Circuit that Facebook users were not slated to receive a penny in exchange for releasing claims that Facebook’s Beacon program violated their privacy rights. Instead, all of the money in the settlement that didn’t go to class counsel’s legal fees and expenses was to be directed to a new charity, the Digital Trust Foundation, with a two-person advisory board consisting of a Facebook representative and a plaintiffs lawyer from the case. Public Citizen took the position that charity-only payouts, otherwise known as cy pres settlements, are sometimes appropriate, but not when the lucky recipient of class members’ money doesn’t have the same interests as the class.

Public Citizen lost the appeal in September 2012. So you might think the public interest group would hop aboard a petition for Supreme Court review of the 9th Circuit ruling by class action watchdog Ted Frank of the Center for Class Action Fairness, who represents another objector. If so, you’d be wrong.

In a brief filed Thursday with the Supreme Court, Public Citizen said it was taking no position on whether the court should grant cert, though it said it agreed with the Center for Class Action Fairness that the Facebook Beacon settlement is fatally flawed. But the brief also undermined CCAF’s argument that there’s a split among the federal circuit on the standard for cy pres settlements. Public Citizen actually agreed with its former opponent Facebook, which filed its brief opposing cert on Tuesday: There is no meaningful difference, they both said, amongst the federal appeals courts that have issued recent rulings establishing standards for cy pres awards. So there is no reason for the Supreme Court to take up the issue.

How a contrarian appellate judge helped brokers in Merrill race case

Alison Frankel
Aug 28, 2013 21:05 UTC

In a historic decision in June 2011, the U.S. Supreme Court ruled that female employees of Wal-Mart could not sue the company for gender discrimination as a nationwide class. The court said in Wal-Mart v. Dukes that the women could not attribute any discrimination they’d supposedly suffered to corporate policies because those policies were implemented by local managers. I’m ignoring the subtleties of a long and complex decision, but, in essence, the Supreme Court concluded that Wal-Mart’s nationwide policies weren’t strong enough glue to bind together women with individual employment histories. A sweeping class action, the court said in a decision written by Justice Antonin Scalia, could not provide “a common answer to the crucial discrimination question.”

Dukes was widely viewed as a death knell for nationwide employment discrimination class actions (not to mention other broadly formulated class actions). So how is it that two years after the Supreme Court’s ruling, 700 African-American brokers who claim to have suffered race discrimination at Merrill Lynch have obtained a $160 million class action settlement from Bank of America, Merrill’s successor?

The answer lies in a bold reading of Dukes by the brokers’ lawyers at Stowell & Friedman – and a surprising endorsement of that interpretation by the 7th Circuit Court of Appeals, in an opinion written by a free-thinking judge who has shown no hesitation to tangle with Dukes author Scalia. Had it not been for Judge Richard Posner and his colleagues on the 7th Circuit panel that heard the Merrill brokers’ appeal, this case would not have resulted in what The New York Times reported to be the biggest-ever race discrimination payout by a U.S. employer. But don’t get too excited: According to the lawyer who won the Dukes case at the Supreme Court, Posner’s ruling in the Merrill class action isn’t going to help other employees who want to band together to bring discrimination claims.

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