‘Good Company’ Behavior Can Knock Out Class Actions

New York Law Journal

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 product 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 ill-gotten gains.

Perverse Incentives

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 as reasonable).

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 customs 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 showmanship.

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.

Remedial Programs

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” remedial behavior.

In 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 else could.”

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 controversy.

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 Action.”⁵

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 Dots case.

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 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.

Conclusion

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.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes

1.  See 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. 1998).
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.  7Voigt, 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. 2011).
9.  Id. at 752.