By Michael Hoenig - New York Law
Journal - May 16, 2013
The questions we tackle in this article
are important ones. Can a good, responsible company act quickly
in remediating customer problems that are also the subject of a
putative class action without additionally being sucked into
years-long, costly and draining class litigation? Can class
actions be dismissed because they are not "superior" to
voluntary refund and repair programs? Some courts say "yes," and
a few say "no." A recent law review article by Professor Eric
Voigt argues "yes." He declares the naysayer courts to be
"wrong." More about that later.
The "class actionization of
America," a term I used in prior articles to describe the
proliferation of consumer class actions seeking mega-relief for
all sorts of perceived shortcomings in products and services,
continues unabated. A newer darling of the plaintiffs' class
action bar is pleading violations of a state's consumer fraud
act, a legal theory supplementing more traditional counts
sounding in breach of warranty and products liability. The
pleader can thereby turn the slightest perceived dereliction in
product performance into a deep, dark, conspiratorial,
anti-consumer fraud that allegedly shortchanged the class
members and lined the corporate defendant's pockets with
Additionally, the class action
system creates perverse incentives, harmful disincentives and
significant conflicts with the normal law of sales as reflected
in the Uniform Commercial Code. We don't have space here to
elaborate all of these negative factors so one illustration of
each should perhaps suffice for now. One well-recognized
perversity is that class attorneys have a huge incentive to
settle quickly and obtain a large fee at the expense of class
members.1 The jewel in the crown of such dispositions
is the coveted attorney fee award which is usually quite
sizable. One treatise suggests that attorney fees average about
one-third the value of the settlement. Such awards often include
a multiplier over and above the "lodestar" (the attorneys' total
hours times the highest dollar hourly rate a court will accept
Why grant such windfall fees?
Because, suggest some courts, lawyers must be incentivized to
take on "small recovery" lawsuits and endure the risks of class
litigation. Exactly why the highest market hourly rates would
not suffice is unclear. Nevertheless, the dangled fee carrots
work their magic very well. Thus, it is common to see three,
five, 10 or more law firms "partnering" in a large consumer
class action. Alternatively, several law firms individually file
separate "copycat" lawsuits against the same defendants and then
"network" with each other until multidistrict litigation is
ordered or a global settlement is reached.
Further, one harmful
disincentive is that a "good company," one that wants to do the
right thing quickly—for example, to satisfy its customers or to
refund them for damage or expenses or to extend a warranty—can
be "chilled" from acting benevolently because the pendency of
the class action imposes potentially harsh consequences. The
lawyers will claim the remedial measures are an admission of
"guilt." They will claim a large fee for being a "catalyst" in
causing the voluntary program. They will claim "more" should
have been done and, so, the litigation will drain on
notwithstanding implementation of a remedial program.
Moreover, the normal sales law,
as reflected in the Uniform Commercial Code (for example,
regarding warranties) is structured upon a framework in which
appropriate notice is first given to the seller about an alleged
breach of warranty. The seller is given an opportunity to repair
or replace the item or to make other amends within market custom
that are satisfactory to the purchaser. This rational approach
is even reflected in consumerist automobile "Lemon Law" statutes
where the seller is usually given a number of opportunities to
first repair the car before litigation or arbitration ensues.
But class action litigation, with its "race to the courthouse"
by competing lawyers, with its pure fiction of class
representatives purporting to "represent" numerous class members
who actually may have had no damage or no bad experience as
alleged by the named plaintiff, or who may not want to sue at
all, upends the UCC's reasoned approach.
Moreover, there seems to be an
undercurrent assumption in consumer class litigation,
particularly of the consumer fraud act variety, that defendant
manufacturers, sellers and providers of services normally and
routinely are out to cheat or shortchange their customers. This
underlying aura of suspicion is successfully "sold" by advocates
who trumpet in news conferences and other media their new class
action filings claiming this or that corporate misdeed. Often
such claims are the product of the pleader's creativity and
Perhaps some claims against
"rotten apple" corporate defendants may be well-taken. But, just
as a few rotten apples do not reflect the conduct of the
population at large, so too, misbehavior by a company here and
there ought not be the template by which all corporate conduct
should be judged. The underlying assumption that all or most
companies are cheats out to defraud or shortchange their
customers is itself a perversity that should not influence class
action practice. Judges, particularly, ought to be immune to
such fictions or importunings.
The notion that most corporate
defendants are cheats and frauds is unjustified for cogent and
pragmatic reasons. Many manufacturers operate in
government-regulated industries. There are penalties and
consequences for falling below the mark regarding products that
must conform to regulations and standards. Further, the adverse
publicity that would follow is a potent deterrent against
devious misconduct. Company executives answerable to their
boards of directors and shareholders wish to avoid such
derelictions, not invite them. They want to keep their jobs, not
lose them. State regulation, state attorneys general actions and
threats of real litigation augment an array of disincentives to
cheat. Moreover, company executives, engineers, employees and
service providers—and their families—are often users and
consumers of the very products their company makes.
Perhaps the most important
reason for casting aside the harsh and irrational assumption
that corporations are out to harm the consuming public is that
companies want to keep their customers! They want their customer
base to grow, to be vibrant and viable for years to come. They
want to succeed and be responsible actors in the marketplace.
Yes, they want to make a profit. Yes, they may want to cut costs
as part of that initiative. But the profit motive is healthy.
Profitable companies provide jobs, a return on investments to
their shareholders, research and development producing newer,
better, safer and more efficient products. So, it is time to
cleanse the legal system of tactically forged suspicions about
companies at large. Each case rightly sits on its own bottom.
The foregoing raises
interesting questions. To what extent can a "good company," a
"responsible" firm, moot a class action by engaging in good
remedial conduct when something goes wrong for its customers?
Can a class certification be denied, for example, on the
strength of a company's voluntary refund program to its
customers for damage or expenses or loss? Can the seller's grant
of an extended warranty under which repairs or service or a
performance upgrade will be made cause the class action to be
dismissed? Can a recall campaign in which a "fix" is installed
and reimbursement offered for out-of-pocket expenses topple a
class action? The short answer, a cautious "yes," may surprise
you. In fact, however, a number of courts have already knocked
out class actions on the strength of responsible, "good company"
my July 2012 column2 I reported on the Tenth
Circuit's decision in
Winzler v. Toyota Motor Sales U.S.A.,3 where
a putative class claim that defective engine control modules
caused stalling in 2006 Corolla vehicles was dismissed because
the defendant conducted a nationwide recall overseen by the
National Highway Transportation Safety Administration (NHTSA).
Plaintiff had asked for an order requiring Toyota to notify all
owners of a defect and create and coordinate an equitable fund
to pay for repairs.
The appellate court upheld the
dismissal on the ground of "prudential mootness," a doctrine in
which a court stays its hand because a coordinate branch of
government is effecting an adequate remedy. In addition to
various policy reasons for not adding the "promise of a judicial
remedy to the heap," the court said that its intervention would
"surely add new transaction costs for Toyota and perhaps reduce
the incentive manufacturers have to initiate recalls…. Perhaps
the lawyers would benefit" but it was hard to see "how anyone
A similar result (but not on
the ground of "prudential mootness") was reached in Chin v.
Chrysler Corp.,4 where the court denied class
certification because the manufacturer agreed to pay its
customers for out-of-pocket expenses related to a defective
braking system in addition to recalling some 300,000 vehicles in
an NHTSA-overseen recall campaign. Chrysler voluntarily replaced
the braking systems, reimbursed owners' expenses relating to the
brakes and extended the warranties. The court evaluated the
voluntary program and held that the class action was not a
"superior" method for "fairly and efficiently" adjudicating the
Under Rule 23(b)(3) of the
Federal Rules of Civil Procedure, the class action must be
"superior to other available methods for fairly and efficiently
adjudicating the controversy." This is called the "superiority"
requirement. The class mechanism is not to be "just as good as"
another method but "superior." The burden of proving such
superiority is on the plaintiffs. If a refund program or
provision of extended warranties or another benevolent remedial
method "fairly and efficiently" resolves the controversy and is
as good as a class action, the court can dismiss the class
action. This subject is fully discussed in a recent law review
article by Eric Voigt, professor at Jones School of Law in
Montgomery, Ala., "A Company's Voluntary Refund Program for
Consumers Can Be a Fair and Efficient Alternative to a Class
Voigt cites and discusses nine
district courts that have ruled the proposed classes were not
"superior" to defendants' voluntary refund or remedial programs.6
The article contends that arguments for allowing voluntary
refund programs to displace class actions are strongly supported
by the Advisory Committee Notes to the 1966 amendment to Rule
23, commentary by two former members of the committee, the
original purpose of the superiority requirement and courts' and
commentators' initial interpretations of the 1966 amendment.
Voigt argues compellingly that two circuit decisions and one
federal district decision stating that Rule 23(b)(3)'s language,
"other available methods for the…adjudication of the
controversy" includes only other judicial procedures are wrong.7
All three courts "misinterpreted the Advisory Committee Notes,"
"ignored Professor Wright's commentary" and "misunderstood the
history and original purpose of the 1966 amendment." Further,
other courts have dismissed class actions as not "superior" to
actions by non-judicial administrative bodies.
In the Seventh Circuit's
Aqua Dots decision,8 although the court held that
only alternative judicial procedures are relevant to a
superiority analysis, the appellate court nevertheless affirmed
the denial of class certification based on Federal Civil
Procedure Rule 23(a)(4) not being satisfied. The court
concluded: "A representative who proposes that high transaction
costs (notice and attorney fees) be incurred at the class
members' expense to obtain a refund that already is on offer is
not adequately protecting the class members' interests."9
Thus, yet another means of dismissing a class action in favor of
a voluntary remedial program has been articulated in the Aqua
Empirically, it seems that at
least some 90 percent of certified class actions settle.
Researchers say that it takes three years on average between the
filing of a class action and court approval of a settlement.
Then the settlement has to be effected which takes more time.
And, if objectors appeal, the settlement's execution can be
delayed further. Thus, the class action system—so much
championed by its advocates and by some judges—has built-in
costs and inefficiencies that often bring slight, if any, gain
to most class members, large fees to attorneys, heavy
transaction costs for litigation and notice of settlement and
years of delays in obtaining relief.
Clearly, in order to displace a
class action, the defendant's refund or remedial program must be
"fair and efficient." When a company voluntarily acts
responsibly via refund programs, extended warranties, service
campaigns or repairs, the consumer who actually suffered loss
can be reimbursed much more quickly than the three-year average
delay in settling class actions. Further, those customers who
have no problems or complaints with their product need not be
dragged into a lawsuit they want no part of nor will they be
precluded from suit later on since no res judicata effect is
being imposed on them.
Moreover, no extravagant
attorney fees will eat into the funds allocated for such
remedial programs. Finally, the responsible company can act
early and decisively in satisfying their customers and retaining
them. After all, the class members at large are not truly the
defendant's adversaries. Only the artifice and fiction created
by the class action device names them as such.
Hoenig is a
member of Herzfeld & Rubin.
Ortiz v. Fiberboard, 527 U.S. 815, 852 n. 30 (1999)
("with an already enormous fee within counsel's grasp, zeal for
the client may relax sooner than it would in a case brought on
behalf of one claimant").
2. Hoenig, "
Recall Moots Class Action," New York Law Journal, July 9,
2012, p. 3.
3. 2012 U.S. App. LEXIS 12297
(10th Cir. June 18, 2012).
4. 182 F.R.D. 448 (D.N.J.
5. 31 The Review of Litigation
617 (Summer 2012), electronic copy available at: http://ssrn.com/abstract=1913974.
6. Id. at 621 n. 13, 640-646.
The nine cases cited are: Webb v. Carter's, 272 F.R.D.
489, 505 (C.D. Cal. 2011); In re Aqua Dots Prods. Liab. Litig.,
270 F.R.D. 377, 385 (N.D. Ill. 2010), aff'd on other grounds,
654 F.3d 748 (7th Cir. 2011); Patton v. Topps Meat, No.
07-CV-654S(M), 2009 WL 2027106 (W.D.N.Y. May 27, 2010), adopted
by July 7, 2010 Text Order by District Judge William M. Skretny;
In re Conagra Peanut Butter Prods. Liab. Litig., 251
F.R.D. 689, 701 (N.D. Ga. 2008); Drimmer v. WD-40, No.
06-CV-900, 2007 U.S. Dist. LEXIS 62582, at *5 (S.D. Cal. Aug.
24, 2007); In re Phenylpropanolamine Prods. Liab. Litig.,
214 F.R.D. 614, 623 (W.D. Wash. 2003); Jones v. Allercare,
203 F.R.D. 290, 308 (N.D. Ohio 2001); Chin v. Chrysler,
182 F.R.D. 448, 465 (D.N.J. 1998); Berley v. Dreyfus & Co.,
43 F.R.D. 397, 399 (S.D.N.Y. 1967).
7. Voigt, supra n. 5, at pp.
632-636. The three federal decisions are: Amalgamated Workers
Union v. Hess Oil Virgin Islands, 478 F.2d 540, 547 (3d Cir.
1973) (stating in dicta that a governmental administrative
remedy is irrelevant to the superiority requirement);
In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748, 752
(7th Cir. 2011), rehearing en banc denied (Sept. 15, 2011)
(relying on Hess that only alternative judicial
procedures are relevant to a superiority analysis); Turner v.
Murphy Oil USA, 234 F.R.D., 597, 610 (E.D. La. 2006)
(rejecting private settlement program for oil spill as a
superior method; "other methods of adjudication" language
precludes considering out-of-court private settlement program).
Professor Charles Alan Wright was a member of the Advisory
Committee and author of a seminal treatise, Federal Practice
and Procedure. The first edition in 1972 explained that a
court need not confine itself to other available "judicial"
methods in considering superiority of the class action.
8. 654 F.3d 748, 752 (7th Cir.
9. Id. at 752.
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