CLASS ACTION DEFENSE BLOG OFF FOR THANKSGIVING
The author of the Class Action Defense Blog is taking the day off for the Thanksgiving holiday. A new class action article will be published on Monday, December 1
The author of the Class Action Defense Blog is taking the day off for the Thanksgiving holiday. A new class action article will be published on Monday, December 1
The author of the Class Action Defense Blog wishes all of you a very Happy Thanksgiving, and urges class action defense counsel to take the day off! A new class action article will be published on Monday, December 1.
Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Adequately Allege Failure to Disclose and because Class Action Complaint Failed to Create Strong Inference of Scienter Sixth Circuit Holds
Plaintiffs filed a class action against Visteon Corporation and certain officers and directors of Visteon, and against its outside auditor, Pricewaterhousecooper, alleging violations of federal securities law; specifically, the class action complaint asserted claims for violations of § 11 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and § 20(a) of the Exchange Act. Ley v. Visteon Corp., 543 F.3d 801, 804-05 (6th Cir. 2008). The class action complaint followed the disclosure by Visteon of “$108 million in accounting errors which understated net losses by in excess of $60 million,” id., at 805. According to the class action, this disclosure “shocked the market” and caused Visteon’s stock to drop dramatically. Id., at 804-05. Defense attorneys moved to dismiss the class action complaint, id., at 804. Defense attorneys moved to dismiss the class action’s § 11 claim as barred by the statute of limitations, id., at 806. The defense motion as to the remaining class action claims focused on the failure of the class action complaint to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). The district court granted the motion and dismissed the class action complaint in its entirety, id., at 805. Plaintiffs appealed but did not challenge the dismissal of the class action’s § 11 claim, id., at 806; accordingly, the Sixth Circuit affirmed that portion of the district court’s order without discussion and focused its analysis only on the remaining claims. The Sixth Circuit affirmed.
After discussing briefly the rules governing its review of the dismissal of the class action complaint, see Ley, at 805-06, the Sixth Circuit summarized the law governing securities fraud claims and the heightened pleading requirements necessitated by the PSLRA, see id., at 806-07. The § 10(b)/Rule 10b-5 class action claim against Visteon alleged that it failed to disclose certain information; specifically, Visteon, a spin-off of Ford Motor, “failed to disclose that ‘Ford so dominated the day to day business affairs of Visteon via the contracts between the two and beholden Visteon management, such that Visteon was essentially no more than a repository for operations of Ford that had built in losses.’” Id., at 807. In the words of the Circuit Court, “Essentially, Plaintiffs argue that Defendants failed to adequately disclose that Visteon may have difficulty shedding unprofitable business lines.” Id. The Sixth Circuit disagreed finding the company’s disclosure to be “rife with such information.” Id. And the Circuit Court similarly rejected plaintiffs’ other claims regarding Visteon’s failure to disclose material information, see id., at 807-08. In fact, the Court found that defendants made numerous disclosures and that Visteon was under no duty to disclose information relative to its competitors, id., at 808. As the Sixth Circuit explained at page 808:
Class Action Complaint by Car Dealers Against Ford Arising out of Blue Oval Program Erroneously Certified as Class Action because Rule 23(b)(3)’s Predominance and Superiority Requirements not met Third Circuit Holds
Nine plaintiffs filed a putative class action against Ford on behalf of themselves and other Ford dealers; the class action complaint alleged that Ford’s Blue Oval Program violated state and federal law. Danvers Motor Co., Inc. v. Ford Motor Co., 543 F.3d 141, 142-43 (3d Cir. 2008). The federal court dismissed the class action for lack of standing, and plaintiffs filed an amended class action complaint. Id., at 143. In response to a defense motion to dismiss the amended class action, the federal court again concluded that all but one of the named plaintiffs lacked standing to prosecute the action, id. The Third Circuit reversed. See Danvers Motor Co. v. Ford Motor Co., 432 F.3d 286 (3d Cir. 2005). Plaintiffs moved the district court to certify the litigation as a class action, and the court granted the motion. Danvers, 543 F.3d at 143. The Third Circuit granted Ford leave to appeal pursuant to Rule 28 U.S.C. § 1292(b), and reversed.
Ford’s Blue Oval Program, which ran from April 2000 to March 2005, was a voluntary program extended to all Ford dealers “to improve dealer performance and customer satisfaction” by “provid[ing] cash bonus payments and other benefits to Ford dealers who improved customer satisfaction according to certain criteria.” Danvers, at 143. The class action complaint alleged that the Blue Oval Program violated the Robinson-Patman Act, the Automobile Dealer's Day in Court Act, and various state franchise laws. Id., at 143-44. The class action alleged further that Ford breached the terms of its Sales and Service Agreement with its dealers, and sought “both injunctive relief and damages on behalf of approximately 4,000 Ford dealers.” Id., at 144. However, the Third Circuit observed that some dealers were “certified” under the Blue Oval Program while other dealers were not certified under the Program, and that “dealers expended different efforts with respect to certification, [and] the dealers were impacted by the [Program] in different ways.” Id. Indeed, the Third Circuit summarized the way in which the specific injuries allegedly suffered by the nine named plaintiffs showed those differences, see id., at 144-45.
Securities Fraud Class Action Properly Dismissed for Failure to Adequately Plead Falsity and Scienter because Allegations in Class Action Complaint did not Meet Heightened Pleading Requirements Under Private Securities Litigation Reform Act of 1995 (PSLRA) Eighth Circuit Holds
Plaintiffs filed a class action against Centene Corporation and three of its officers alleging violations of federal securities law; the class action complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and of Rule 10b-5. Elam v. Neidorff, 544 F.3d 921, 924-25 (8th Cir. 2008). The class action centered on the company’s estimates of costs that had been “incurred but not reported” (IBNR). According to the class action, Centene – a “healthcare enterprise that primarily provides programs and related services to individuals receiving benefits under Medicaid,” acted as “an intermediary between the government and Medicaid recipients in the states” and “receive[d] a monthly amount for each Medicaid recipient in its plan and, in turn, [paid] for the recipient's healthcare services.” Id., at 925. In filing its quarterly reports, the company “include[d] not only the costs incurred and billed during the quarter but also an estimate of medical costs that have been incurred but not reported (IBNR).” Id. Centene’s calculation of IBNR was necessarily an educated guess: it represented “an estimate of claims liability because some medical events occur before the end of a given reporting period (and Centene is therefore liable to pay them) but have not yet been formally billed to the company,” and Centene calculated the estimate “on a monthly basis employing various factors, including in-patient hospital utilization dates and prior claims experience.” Id. Moreover, “Independent actuaries review Centene's quarterly estimates.” Id. In April 2006, Centene filed its Form 10-Q with the SEC and issued a press release that “were positive and in line with analyst estimates,” and providing positive guidance for the second quarter as well as the balance of the year. Id., at 925-26. In July 2006, the company disclosed that second quarter earnings would be “substantially lower than expected,” and this securities fraud class action complaint soon followed. Id., at 926. Defense attorneys moved to dismiss the class action complaint on the grounds that it failed to satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion and dismissed the class action “finding that plaintiffs failed to allege facts demonstrating that defendants had misrepresented a material fact or acted with scienter.” Id., at 926. The Eighth Circuit affirmed.
After summarizing the “heightened pleading requirements” imposed by the PSLRA on securities fraud cases (class action and non-class action), Elam, at 926-27, the Eighth Circuit turned its attention to plaintiffs’ claim that the class action complaint “sufficiently alleges both falsity and scienter, satisfying the elevated pleading standard for their securities fraud class action,” id., at 927. The Circuit Court held that the mere fact defendants “monitored” its medical costs was insufficient under the PSLRA to establish that defendants knew of information that contradicted any of the financial statements they made, id. The Eighth Circuit refused plaintiffs’ invitation to infer that defendants’ statements were false “based solely on defendants’ representations as to their ability to estimate medical costs.” Id. On the contrary, the PSLRA's heightened pleadings standards requires that falsity be pleaded with particularity, and this requirement “cannot be satisfied with allegations that defendants made statements ‘and then showing in hindsight that the statement is false.’” Id. (quoting In re Navarre Corp. Sec. Litig., 299 F.3d 735, 743 (8th Cir. 2002)). Plaintiffs’ failure to “point to any contemporaneous reports, witness statements, or any information that had actually been provided to defendants as of April or June that indicated that Centene would need to increase estimated medical costs” was fatal to the class action. Id. (citation omitted). The Circuit Court therefore affirmed the district court’s conclusion that falsity had not been adequately pleaded. Id., at 927-28.
As a resource for California class action defense attorneys, we provide weekly, unofficial summaries of the legal categories for new class action lawsuits filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the preceding week. This report covers November 14 - 20, 2008, during which time 49 new class action lawsuits were filed. Generally, class actions alleging employment-related claims top the list of the new class action by a wide margin, but new labor law class action filings have been far lighter than usual over the past few weeks. This past week reflected a "return to the norm," however, as 26 of the new class action lawsuits filed during the past week involved employment-related claims, representing 53% of the total number of new class actions filed during that time period. The only other category to meet the 10% threshold involved class actions alleging violations of California's Unfair Competition Law (UCL), which include false advertising claims, with 10 new filings (20%).
Judicial Panel Grants Plaintiff Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Unopposed by Common Class Action Defendants or by Plaintiffs in New York Class Action, and Transfers Class Actions to Northern District of Oklahoma
Two class actions – one in Oklahoma and one in New York – were filed against SemGroup Energy Partners alleging violations of federal securities laws; specifically, the class action complaints alleged that defendants “made materially false and misleading statements which artificially inflated the price of SGLP common stock in violation of the federal securities laws” In re SemGroup Energy Partners, L.P., Securities Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. October 10, 2008) [Slip Opn., at 1]. Plaintiffs in the Oklahoma class action filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407 in the Northern District of Oklahoma; plaintiffs in the New York class action supported the motion but argued alternatively for transfer of the class actions to the Southern District of New York. Id. The Judicial Panel granted the motion to centralize the class action lawsuits and agreed that the Northern District of Oklahoma was the appropriate transferee court, particularly as it was supported by all parties and because “SGLP, its general partner and affiliated individual defendants are located in Tulsa, Oklahoma, and parties, witnesses and documents may be found there.” Id., at 1-2. Accordingly, the Panel centralized the class actions in Oklahoma, id., at 2.Download PDF file of In re SemGroup Energy Partners, L.P., Securities Litigation Transfer Order
Class Action Alleging Violations of Kansas Wage Payment Act may be Brought by Plaintiffs who do not Live or Work in Kansas because State Law Contains no Express Geographical Limitation and Employment Agreement Expressly Contained Kansas Choice of Law Provision Federal Court Holds
Plaintiffs filed a class action against their employer, Sprint Nextel and Sprint/United Management (collectively “Sprint”) alleging violations of federal securities law; specifically, the class action claimed that “Sprint failed to pay [plaintiffs] proper commissions.” Harlow v. Sprint Nextel Corp., 574 F.Supp.2d 1224, 1225 (D. Kan. 2008). According to the class action, plaintiffs were to be paid according to a “Business Incentive Compensation Plan that governed commissions they would receive based on sales of various products and services”; however, due to computer problems plaintiffs were not paid the proper amount of commissions. Id. None of the plaintiffs lived or worked in Kansas, id., at 1226, but the class action was filed in Kansas because the Plan provides that Kansas law governs the employment agreement and that any disputes under the Plan must be brought in Kansas, id., at 1225. The class action complaint alleged violations of Kansas’s Wage Payment Act, and sought relief also under theories of breach of contract, quantum meruit, promissory estoppels, and unjust enrichment. Id., at 1225. Defense attorneys filed a motion to dismiss the class action, which the district court treated as a motion for judgment on the pleadings because Sprint had already filed an answer to the class action complaint. Id. At the time the district court ruled on the motion, the only issue that remained open for resolution was the viability of the Wage Payment Act claim, id. The district court denied the motion as to that claim, holding that it could not determine as a matter of law that the Kansas Wage Payment Act could not be brought by employees who neither lived nor worked in the state.
After discussing the applicable standard of review, see Harlow, at 1225-26, the district court turned to Sprint’s argument that “the named Plaintiffs cannot seek protection under the Kansas Wage Payment Act (KWPA) because none of them live or work in Kansas,” id., at 1226. The district concluded that the Seventh Circuit opinion relied upon by the defense – Glass v. Kemper Corp., 133 F.3d 999 (7th Cir. 1998), which held that “the Illinois Wage Payment and Collection Act does not apply to employees outside of Illinois” – was distinguishable from the class action before it because (1) the Illinois Wage Payment Act expressly limits its reach to “employers and employees in this state,” and (2) the employment agreement in Glass did not include a choice of law provision, whereas the Sprint employment agreement expressly provided that “Kansas law governs the Plan.” Id. Defense attorneys argued that the choice of law provision in the Plan could not give “extraterritorial effect” to Kansas’s Wage Payment Act, id. In the absence of Tenth Circuit authority on the subject, the district court adopted the reasoning of the Ninth Circuit, which held that “where a state law includes no express geographical limitation, courts may apply it to a contract that, because of a choice of law provision, falls under that state's law,” but that “[if] the state law contains limits on its geographical scope, ‘courts will not apply it to parties falling outside those limitations, even if the parties stipulate that the law should apply.’” Id. (quoting Gravquick A/S v. Trimble Navigation Int'l Ltd., 323 F.3d 1219, 1223 (9th Cir. 2003)). Following Ninth Circuit authority, then, the federal court concluded that the Kansas Wage Payment Act could be applied “with no geographical restriction” because of the Plan’s choice of la provision. Id., at 1226-27. The district court held, further, that the Kansas Wage Payment Act “is not limited to employees who live and work in Kansas, and the choice of law provision contained in the Plan allows Plaintiffs to seek relief under Kansas law, including the KWPA.” Id., at 1227. Accordingly, it denied the motion to dismiss.Download PDF file of Harlow v. Sprint
Class Action Against Oracle Alleging Failure to Pay Overtime Pursuant to State and Federal Laws Survives Summary Judgment as to California Law Claims because Nonresidents are Protected by California Labor Code for Work Performed within California, but District Court Properly Granted Summary Judgment as to Class Action Claim Alleging Violation of California’s Unfair Business Practices Act (UCL) for Failure to Pay Overtime under Federal Fair Labor Standards Act (FLSA) because California’s UCL “does not have Extraterritorial Application” Ninth Circuit Holds
Plaintiffs filed a class action against their employer, Oracle, alleging labor law violations; specifically, the class action complaint asserted that Oracle failed to pay employees overtime under either the federal Fair Labor Standards Act (FLSA) or California state law. Sullivan v. Oracle Corp., ___ F.3d ___ (9th Cir. November 6, 2008) [Slip Opn., at 15261]. According to the class action, Oracle hired hundreds of employees “to train Oracle customers in the use of its software” but “classified these workers as teachers who were not entitled to compensation for overtime work under either federal or California law.” Id. The putative class was not limited to California residents, and the three putative class representatives were nonresidents of California who “performed only some of their work for Oracle in California,” id. The class action complaint contained three claims for relief – two of them sought recovery for work performed in California, and one for work performed “anywhere in the United States.” Id. Each of the claims, however, was premised on California law; specifically, either the California Labor Code, or California Business & Professions Code section 17200 (unfair business practices). Id., at 15264-65. Defense attorneys moved for summary judgment on all claims in the class action; the district court granted the motion “on the ground that the relevant provisions of California law did not, or could not, apply to the work performed by Plaintiffs.” Id., at 15261. The district court reasoned that California’s Labor Code “do[es] not apply to nonresidents who work primarily in other states,” and that it would violate the Due Process Clause of the Fourteenth Amendment to construe the Labor Code so as to apply to work performed primarily outside of California, id., at 15265. Similarly, the federal court concluded that California’s unfair business practices statute does not apply to work performed outside of California, id. The Ninth Circuit affirmed as to the class action’s unfair business practices claim premised on work performed outside of California, but reversed as to the first two claims for relief.
Briefly, Oracle’s principal place of business is California, and it hires “instructors” on a contract basis to travel throughout the U.S. and for the purpose of training its customers in the use of Oracle software. Sullivan, at 15261-62. Three individuals – two of them residents of Colorado, and the third a resident of Arizona – worked as Oracle Instructors; they each spent a limited amount of time in California, though not necessarily each calendar year. See id., at 15262-63. None of the plaintiffs worked more than 36 days in California during a calendar year, and one of the plaintiffs did not work in California at all one year. Id. Oracle originally classified its instructors as “teachers” and did not pay them overtime; however, in 2003 Oracle reclassified its California instructors and began paying them overtime under California law, and in 2004 it reclassified its remaining instructors and began paying them overtime under the FLSA. Id., at 15263.
Class Action Claims not Rendered Moot by Rule 68 Offer of Judgment to Settle Individual Claims of Named Plaintiffs so long as Plaintiffs have not Delayed in Seeking Class Action Treatment of Litigation Ohio Federal Holds
Two class action lawsuits were filed against the law firm of Cheek & Zeehandelar, a consumer debt collection firm, alleging violations of the federal Fair Debt Collection Practices Act (FDCPA) and Ohio's Consumer Sales Practices Act (CSPA); the class action complaints alleged that defendant “engages in misleading and deceptive debt-collection practices” and that it “uniformly fails to properly investigate whether debtor funds are lawfully subject to attachment, prior to seeking and obtaining orders of attachment. Stewart v. Cheek & Zeehandelar, LLP, 252 F.R.D. 384, 384-85 (S.D. Ohio 2008). The class actions were consolidated, and the district court ordered that plaintiffs file their motion for class action certification by February 15, 2008. Id., at 385. Prior to February 15, defendant served a Rule 68 offer of judgment on plaintiffs, which offered to compensate them for their individual claims only; the Rule 68 offer did not offer to settle the claims of the putative class. Id. Plaintiffs moved to strike the offer of judgment and, on February 15, 2008, filed their motion for certification of the litigation as a class action. Id. The district court granted plaintiffs’ motion to strike the offer of judgment.
The district court began its analysis by noting that “[t]he purpose of Rule 68 ‘is to encourage settlement and avoid litigation.’” Stewart, at 385 (quoting Marek v. Chesny, 473 U.S. 1, 5 (1985)). Rule 23 class actions, by contrast, serves to vindicate important constitutional and statutory rights by permitting individually small damage claims to be grouped together so that the amount of money involved is worth the fight. Id. Or as the Supreme Court put it, “Where it is not economically feasible to obtain relief within the traditional framework of a multiplicity of small individual suits for damages, aggrieved persons may be without any effective redress unless they may employ the class-action device.” Deposit Guar. Nat'l Bank v. Roper, 445 U.S. 326, 339 (1980). The district court observed at page 385, “The great weight of federal authority holds that a Rule 68 offer of judgment cannot moot the named plaintiffs' claims after a motion for class certification has been filed.” (Citations omitted.) To hold otherwise would permit defendants to “unilaterally control whether the district court ever heard the certification motion,” id., at 385-86 Moreover, “Although courts are somewhat more divided about the effect of a Rule 68 offer before a class-certification motion has been filed, most have endorsed the view that the settlement offer will not moot the named plaintiffs' claims so long as the plaintiffs have not been dilatory in bringing their certification motion.: Id., at 386 (citations omitted). After summarizing the reasons behind the majority view, the district court adopted that rule and held, further, that plaintiffs had not been dilatory in seeking class action certification. Id., at 386-87. Accordingly, the district court granted plaintiffs’ motion to strike the Rule 68 offer of judgment, id., at 387.
Trial Court Erred in Decertifying UCL Class Action because Post-Proposition 64 UCL Relief does not Extend Beyond Named Plaintiffs Absent Class Action Treatment and because Attorney Fees Generally not Recoverable Absent Class-Wide Relief California State Court Holds
Plaintiffs filed a class action against 24 Hour Fitness alleging violations of California’s unfair competition law (UCL) and Consumers Legal Remedies Act (CLRA), and false advertising; the class action complaint asserted that their health club memberships allowed them to renew for an additional three years – the same period as their original membership contract – “at the same rate if they renewed their membership when the initial term expired,” but defendant asserted that the membership contracts permitted “renewals at the specified rate for an annual term only.” Harper v. 24 Hour Fitness, Inc., ___ Cal.App.4th ___ (Cal.App. October 22, 2008) [Slip Opn., at 2-3]. The class action argued that “24 Hour Fitness’s contracts and sales techniques were deceptive and falsely implied that members who prepaid their dues for the entire contract term were entitled to keep their dues at the same rate if they renewed their membership when the initial term expired.” Id., at 2. In March 2003, the trial court granted plaintiffs’ motion to certify the litigation as a class action, id., at 3-4, but plaintiffs thereafter made seven (7) attempts to modify the definition of the class, each of which were rejected by the trial court, id., at 4-5. In January 2006, defense attorneys moved the trial court to decertify the class, which the trial court granted. Id., at 5-7. The Court of Appeal reversed.
The trial court’s class action decertification order was based on the court’s reexamination of whether a class action was a superior means for resolving the UCL claims and whether – with the benefit of three (3) years of class discovery – plaintiffs could establish commonality and typicality. Harper, at 5-6. The trial court concluded that class action treatment was no longer warranted; on the contrary, it found that class action treatment “has ceased to be beneficial” and that class action treatment had “become an obstacle to the prompt, fair, and (reasonably) economical resolution of this matter.” Id., at 6.. The Court of Appeal summarized the court’s ruling at page 6 as follows:
To assist class action defense attorneys anticipate the types of class action lawsuits against which they will have to defend in California, we provide weekly, unofficial summaries of the legal categories for new class action lawsuits filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the preceding week. This report covers November 7 - 13, 2008, during which time 41 new class action lawsuits were filed. Labor law class actions generally top the list of the new class action filings by a wide margin. Last week was an exception, however, as class actions alleging violations of California's Unfair Competition Law (UCL), which include false advertising claims, seized the top spot. But this week, new class action lawsuits alleging employment-related claims regained the top spot. There were a total of 18 new labor law class actions filed during the relevant time period, representing 44% of the total number of new class actions filed. Not surprisingly, the only other category that satisfied the 10% threshold involved UCLclass actions, with 15 new filings (37%).
Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Unopposed by Class Action Plaintiffs, and Transfers Actions to Eastern District of Louisiana
Three class actions –in the Eastern District of Louisiana, the Western District of Tennessee and the Eastern District of Texas – were filed against DirecTech Southwest alleging violations of the federal Fair Labor Standards Act; specifically, the class action complaints allege defendant failed to pay its technicians overtime as required by the FLSA. In re DirecTech Southwest, Inc., Fair Labor Standards Act (FLSA) Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. October 8, 2008) [Slip Opn., at 1]. Defense attorneys filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407 in the Eastern District of Louisiana; plaintiffs in all three class actions supported the motion. Id. The Judicial Panel granted the motion to centralize the class action lawsuits and agreed that the Eastern District of Louisiana was the appropriate transferee court “because the first-filed and most advanced action is pending there and this choice is supported by all responding parties.” Id.Download PDF file of In re DirecTech Southwest, Inc., Fair Labor Standards Act (FLSA) Litigation Transfer Order
Home Owners’ Loan Act (HOLA) Preempted Class Action Claims Premised on Scheme to Defraud Senior Citizens into Entering into Reverse Mortgages but Plaintiff given Leave to File Amended Class Action Complaint California Federal Court Holds
Plaintiff filed a putative class action against Financial Freedom Senior Funding Corporation alleging that “Financial Freedom instituted a complex scheme to defraud senior citizens in the structuring, origination, underwriting, marketing and sale of reverse mortgages.” Munoz v. Financial Freedom Senior Funding Corp., 567 F.Supp.2d 1156, 1158 (C.D. Cal. 2008). The class action complaint alleged ten claims for relief: elder abuse, violation of California’s Unfair Competition Law (UCL) practices by violating the Real Estate Settlement Procedures Act (RESPA) and Regulation X, false advertising, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, fraudulent concealment, unjust enrichment and imposition of constructive trust, violation of the Consumer Legal Remedies Act (CLRA), breach of the implied covenant of good faith and fair dealing, and negligent misrepresentation. Id., at 1161. At bottom, the class action alleged that defendant “included a number of hidden costs and fees in the reverse mortgage transactions, and also to have paid brokers ‘kickbacks’ for directing borrowers to the company.” Id., at 1158. Defense attorneys moved the district court for judgment on the pleadings as to the class action claims under Rule 12(c) on the ground that the class action claims are preempted by federal law. Id., at 1159. The district court granted the motion in part and denied it in part.
The district court summarized the three ways in which federal law may preempt state law, and noted that while there is generally a presumption against federal presumption, that presumption does not apply to the banking industry because it is “‘an area where there has been a history of significant federal presence.’” Munoz, at 1159 (citation omitted). Defense attorneys argued that the class action claims were preempted by the Home Owners’ Loan Act of 1933 (HOLA), which gave “broad authority” to the Office of Thrift Supervision (OTS) to “promulgate regulations governing savings and loan institutions,” id., at 1160. The OTS regulations, in turn, expressly provide, “OTS hereby occupies the entire field of lending regulation for federal savings associations.” Id. (quoting 12 C.F.R. § 560.2(a)). Under Ninth Circuit authority, “HOLA preempts all state regulation of savings associations under the doctrine of field preemption.” Id. (citations omitted). Specifically, HOLA expressly preempts state laws governing “Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and over limit fees,” § 560.2(b)(5), and “Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents,” § 560.2(b)(9).
Class Action Seeking Credit Monitoring Costs and Identify Theft Insurance Following Theft of Laptops Containing Employees’ Personal Information, including Social Security Numbers, Failed to Establish Negligence or Breach of Fiduciary Duty Claims New York Federal Court Holds
Plaintiff filed a class action against Towers, Perrin, Forster & Crosby, Inc., a benefit and pension consultant to Altria, the parent company of Phillip Morris, where plaintiff worked for 20 years; the class action followed Altria’s disclosure that several laptops had been stolen from Towers’ New York office, and that one of the laptops contained personal information concerning plaintiff, including his social security number. Caudle v. Towers, Perrin, Forster & Crosby, Inc., ___ F.Supp.2d ___, 2008 WL 4104035, *1 (S.D.N.Y. 2008). The class action was filed in federal court under the auspices of the Class Action Fairness Act (CAFA), id., at *4. Altria’s letter to plaintiff stated that “although all of the laptops were ‘password-protected,’ only ‘some’ of the files contained on the hard drive of the laptop were protected by a separate and additional password.” Id., at *1. Plaintiff received an additional letter directly from Towers stating that it had arranged, and would pay for one year, for Caudle to enroll in the Equifax Credit Watch Gold, a 3-in-1 credit monitoring service that would provide plaintiff “with an early warning system for changes to [his] credit file and help [him] to understand the content of [his] credit file at the three credit reporting agencies.” Id. Instead, plaintiff enrolled in “LifeLock,” in part because LifeLock offered more credit fraud insurance than Equifax and because plaintiff believed he needed more than one year of credit monitoring. Id., at *2. Plaintiff’s class action alleged that Towers “negligent and breached its contractual and fiduciary duties in allowing the theft to occur,” and sought “to recover the costs of multi-year credit monitoring and identity theft insurance.” Id., at *1. Notably, the class action complaint did not allege that plaintiff's (or any class member’s) personal information had been misused, or that plaintiff had suffered any out-of-pocket loss other than the cost of credit monitoring and identity theft insurance. Id. The district court bifurcated discovery, “setting a first phase of discovery to permit the parties to explore whether plaintiff has suffered a compensable injury.” Id. At the conclusion of the first phase of discovery, defense attorneys moved for judgment on the class action complaint; the district court granted the motion as to the class action claims for negligence and breach of fiduciary duty, but denied the motion as to the contract claims “without prejudice to the making of a summary judgment motion after the close of all discovery.” Id.
In granting the defense motion, the district court noted that plaintiff had been told “by Towers, his employer, all three credit reporting agencies and by LifeLock's marketing materials that, save for the credit fraud insurance, he could perform all the services performed by LifeLock for free.” Caudle, at *2. The class action complaint alleged that plaintiff and 300,000 others “were injured by the theft of the laptops because their personal information was exposed, creating the potential for identity theft and fraud leading plaintiff and the purported class to spend money on monitoring services.” Id. The class action alleged further that “‘[t]he moneys that Plaintiffs reasonably spend to reduce the danger of identity theft and mitigate their damages’ would have to continue ‘beyond the one-year coverage offered by Towers Perrin.’” Id. However, the only actual damages, if any, suffered by plaintiff or the class was the cost for credit monitoring; the class action did not allege any direct financial loss or that any class member had suffered identity theft. Id.
Class Action Claims Alleging Employer Violated State Law because it did not Ensure Employees took Meal and Rest Breaks Failed because Employer need only make Meal and Rest Breaks “Available” but need not “Ensure” they are taken California State Court Holds
Plaintiff filed a class action against his former employer, Public Storage, alleging state labor law violations; in pertinent part, the class action complaint alleged that the paystubs defendant provided to employees failed to comply with state law, and that defendant failed to ensure that employees took all meal and rest breaks permitted by state law. Brinkley v. Public Storage, Inc., 167 Cal.App.4th 1278 (Cal.App. 2008) [Slip Opn., at 2]. The trial court granted plaintiff’s motion to certify the litigation as a class action. Id., at 4-5. Defense attorneys then moved for summary judgment on the grounds that (1) the class action paystub claim failed because defendant’s misstatements were not knowing and intentional, and plaintiff did not suffer any injury, and (2) the class action meal and rest period claims failed because defendant made the breaks available, and California law requires nothing more. Id., at 2. The trial court granted the defense motion and entered judgment in favor of defendant as to all causes of action in the class action complaint premised on those theories (the third, fifth and sixth causes of action). Id., at 5. The California Court of Appeal affirmed. We address the issues in reverse order, because far more labor law class action complaint allege missed meal and rest breaks.
With respect to the class action’s meal and rest period claim, the appellate court held that an employer need only make such breaks available to employees but need not ensure that they are taken. Brinkley, at 10-12 (meal periods) and 12-13 (rest periods). Specifically addressing the class action’s meal breaks claim, the appellate court explained that while plaintiff introduced evidence only that he and other class members “at times missed meal breaks,” but he “did not produce evidence that he or other employees were denied an opportunity to take them.” Id., at 12. Similarly, as for the class action’s rest period claim, defendant pointed to its written policy authorizing employees to take rest breaks, plaintiff’s receipt of that policy, and defendant statements at meetings instructing employees that they were required to take rest periods. Id., at 13. The Court of Appeal held that plaintiff’s allegation that he “could not” take rest breaks was insufficient to raise a triable issue of material fact, id.
Securities Fraud Class Action Properly Dismissed without Leave to Amend because Class Action Failed to Plead Loss Causation, Scienter or Falsity with Specificity Required by Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds
Plaintiff filed a putative class action against Corinthian Colleges (one of the nation's largest operators of private for-profit vocational colleges) and three of its officers, alleging violations of federal securities laws; specifically, the securities fraud class action alleged violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5. Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1055 (9th Cir. 2008). According to the class action complaint, “Corinthian's colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding – a major source of Corinthian's revenue-that those schools receive.” Id. (footnote omitted). Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion but dismissed the class action complaint with leave to amend. Id., at 1060. Plaintiff filed an amended class action complaint, and defense attorneys again moved to dismiss for failure to meet the PSLRA’s heightened pleading requirements. Id. The district court granted the motion and dismissed the class action without leave to amend, id. The Ninth Circuit affirmed.
We do not here discuss the class action complaint in detail: a detailed summary may be found at pages 1055 through 1059 of the opinion. The Ninth Circuit summarized the class action’s allegations of fraud as including “a variety of false or deceptive schemes: falsifying financial aid applications to obtain federal funds and increase federal award entitlements; encouraging students to falsify federal student aid forms themselves; manipulating student enrollment by counting students not yet enrolled (referred to in the [class action complaint] as ‘false starts’); manipulating or falsifying student grades to maintain federal funding eligibility; exposing the company to bad debt in order to meet regulatory requirements for continued federal funding; delaying notification to federal officials of dropped students and delaying refunds to the federal government after students had dropped; and manipulating job placement data in order to satisfy federal and state regulatory requirements.” Metzler Investment, at 1055. The fraud allegations were based on information from confidential witnesses – “former Corinthian employees that served at numerous campuses in differing capacities” including” campus presidents, admissions officials, financial aid officers, and IT and accounting personnel.” Id., at 1056. The class action complaint relied also on government investigations and private litigation that allegedly confirmed Corinthian's practices, and noted that certain States had revoked, or were threatening to revoke, Corinthian’s accreditation. Id. With respect to scienter, the class action relied on (1) “suspicious stock sales” totaling more than $33 million by two of the individually-named officers, (2) “Corinthian's ‘hands on’ management and tracking of student data and information,” to suggest that “Corinthian's management must have known about underlying fraudulent conduct to achieve maximum federal funding at various schools,” and (3) the allegation that Corinthian’s corporate officers knew that its early revenue recognition practices – “crediting a full month's worth of tuition regardless of whether a student started at the beginning or end of that particular month” – was improper. Id., at 1058. The bottom line is that the alleged fraud purportedly violated GAAP and inflated Corinthian’s stock price, id., at 1056.
As a resource to California class action defense attorneys, we provide weekly, unofficial summaries of the legal categories for new class action lawsuits filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the preceding week. This report covers October 31 - November 6, 2008, during which time 39 new class action lawsuits were filed. Labor law class actions generally top the list of the new class action filings, often by a strikingly wide margin. This past week, however, new class action lawsuits alleging employment-related claims dropped substantially, allowing class actions alleging violations of California's Unfair Competition Law (UCL), which include false advertising claims, to seize the top spot. There were a total of 13 new UCL class actions filed during the relevant time period, representing 33% of the total number of new class actions filed. The only other category that satisfied the 10% threshold involved labor law class actions, with 12 new filings (31%).
Judicial Panel Grants Defense Request for Pretrial Coordination of Two Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Opposed by Illinois Class Action Plaintiffs, and Transfers Actions to Central District of California
Two putative nationwide class actions were filed in the Central District of California and the Northern District of Illinois against Toys “R” Us alleging violations of the federal Fair and Accurate Credit Transactions Act (FACTA); specifically, the class action complaints allege that defendant printed “certain credit and debit card information on customer receipts” in violation of FACTA.” In re Toys "R" Us - Delaware, Inc., Fair & Accurate Credit Transactions Act (FACTA) Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. October 9, 2008) [Slip Opn., at 1]. Defense attorneys filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407 in the Central District of California; plaintiffs in California class action – which is “significantly more advanced” than the Illinois action – did not oppose the motion, but plaintiffs in the Illinois class action did oppose the motion. Id. The Illinois class action plaintiff argued in part that centralization was unnecessary because there are only two actions pending; the Judicial Panel, however, concluded, “Although only two actions are now pending, they are brought on behalf of nearly identical putative nationwide classes, and there is a risk of inconsistent rulings on class certification.” Id. Even though there were only two actions, centralization was appropriate under Section 1407 because “[it] will eliminate duplicative discovery; prevent inconsistent pretrial rulings, especially with respect to class certification; and conserve the resources of the parties, their counsel and the judiciary.” Id. Accordingly, the Judicial Panel granted the motion to centralize the class action lawsuits and agreed that the Central District of California was the appropriate transferee court because the “first-filed action has been pending there for almost two years.” Id., at 1-2.Download PDF file of In re Toys "R" Us - Delaware, Inc., Fair & Accurate Credit Transactions Act (FACTA) Litigation Transfer Order
California Legislature Intended Unclaimed Class Action Settlement Funds to be Used Charitably rather than Returned to Defendant California State Court Holds
Plaintiffs filed a class action against GTE California (now Verizon) alleging that it “engaged in unfair business practices by improperly billing residential customers for rented telephone equipment.” Cundiff v. Verizon California, Inc., 167 Cal.App.4th 718 (Cal.App. 2008) [Slip Opn., at 2]. The parties ultimately negotiated a settlement of the class action; under the terms of the settlement, which covered approximately 170,000 class members, Verizon agreed to reimburse three subclasses of customers various monetary amounts, to donate $1 million to certain designated charities, and to pay named plaintiffs $5000 each as an incentive award. Id., at 4. At the hearing for final approval of the class action settlement, plaintiffs’ counsel requested a percentage of the value of the common fund established by the settlement, which they estimated to be $88 million, id., at 5. Because there was “no way of knowing what the ultimate value of the settlement will be,” the trial court used the lodestar method and awarded $1.7 million in fees. Id., at 6. Later, the class action settlement administrator reported that more than $400,000 in settlement checks remained uncashed or had been returned as no longer valid, id. The parties could not agree on the disposition of the unclaimed funds: plaintiffs’ counsel sought to amend the judgment under California Code of Civil Procedure section 384 so as to direct the administrator to disburse the unclaimed funds pro rata to the designated charities; defense attorneys argued that Section 384 was inapplicable and the funds should revert to Verizon. Id., at 7. The trial court ordered the money returned to Verizon holding that Section 384 did not apply because “the parties simply failed to provide for the possibility of unclaimed funds in the settlement agreement.” Id. The Court of Appeals reversed.
Section 384(a) states that “the intent of the Legislature…[is] to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action, or to promote justice for all Californians.” Section 384(b) authorizes trial courts to “amend the judgment to direct the defendant to pay the sum of the unpaid residue…to nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.” Based on its construction of the statute, the appellate court held that (1) the unclaimed funds constituted “residue” within the meaning of Section 384, Cundiff, at 9-11, and (2) Section 384 is not limited to cy près or “fluid recovery” settlements, id., at 11-13. The Court rejected Verizon’s argument that the settlement established a “claims-made” procedure that required the unclaimed funds revert to Verizon, see id., at 13-14. Accordingly, it reversed the trial court order and remanded for further proceedings. Id., at 15.Download PDF file of Cundiff v. Verizon
Class Action Certification of Multi-State Class Action Alleging Consumer Protection Act Violations Improper because Reliance on Allegedly False/Deceptive Advertisements cannot be Presumed and Commonality not Present Seventh Circuit Holds
Plaintiff filed a putative multi-state class action against Sears, Roebuck alleging false advertising under various state consumer protection statutes and individual claims for violations of Tennessee’s Consumer Protection Act; specifically, the class action complaint asserted that Sears engaged in deceptive advertising practices in connection with the sale of its Kenmore clothes dryers. Thorogood v. Sears, Roebuck & Co., 547 F.3d 742 (7th Cir. 2008) [Slip Opn., at 1]. According to the class action, “the words ‘stainless steel’ were imprinted on the dryer, and point of sale advertising explained that this meant that the drum in which the clothes are dried inside the dryer was made of stainless steel”; plaintiff, however, believed that this meant “that the drum was made entirely of stainless steel.” Id. The class action was filed in federal court, asserting federal jurisdiction under the Class Action Fairness Act (CAFA). Id., at 2-3. The district court granted plaintiff’s motion for class action certification, id., at 3. In concluding that class action treatment was warranted, the district court reasoned that because “Sears marketed its dryers on a class wide basis…reliance can be presumed.” Id., at 10. The Seventh Circuit granted Sears’ appeal and reversed.
The Seventh Circuit discussed at length the pros and cons of class action lawsuits. See Thorogood, at 3-6. It identified one of the problems with class action lawsuits as “the tendency, when the claims in a federal class action are based on state law, to undermine federalism.” Id., at 6. The Circuit Court explained at page 6, “Our plaintiff wants to litigate in a single federal district court half a million claims wrested from the control of the courts of the 29 jurisdictions in which those claims arose and the law of which govern the claimants’ entitlement to and scope of relief. The instructions to the jury on the law it is to apply will be an amalgam of the consumer protection laws of the 29 jurisdictions, and procedural rules by which particular jurisdictions expand or contract relief will be ignored.” The Court noted, for example, that Tennessee’s Consumer Protection Act does not permit class actions. Id. Defense attorneys argued, therefore, that the class action sought relief on behalf of Tennessee residents that would not be available to them in state court. Id., at 7-8. The Seventh Circuit agreed, observing that “the purpose of the diversity jurisdiction is to protect out-of-state residents against state judicial bias in favor of residents; it is not to expand relief obtainable under state law.” Id., at 8.
Private Injunctive Relief Unavailable Under Truth in Lending Act, so District Court in TILA Class Action Seeking such Relief Improperly Granted Class Action Treatment under Rule 23(b)(2) and Erred Further in Awarding $22 Million in Damages as “Restitution or Disgorgement” under Declaratory Judgment Act Eleventh Circuit Holds
Plaintiff filed a class action against Beneficial Florida, Inc. and numerous affiliates (the Bank) alleging violations of the federal Truth in Lending Act (TILA) in the disclosures made by the Bank in connection with a $2000 loan; the class action complaint alleged that the Bank violated TILA by listing the fee for non-filing insurance (NFI) in the wrong column on the disclosure form. Christ v. Beneficial Corp., ___ F.3d ___ (11th Cir. October 28, 2008) [Slip Opn., at 1-2]. Specifically, the class action alleged that the Bank disclosed the NFI as an “amount charged” when it should have been disclosed as a “finance charge,” id., at 4. In part, plaintiff’s class action complaint sought damages, injunctive relief, declaratory relief, and disgorgement, id., at 4-5. The Judicial Panel on Multi-District Litigation centralized the class action with other related class actions against the Bank in the Middle District of Alabama, and ultimately the Alabama federal court certified a nationwide class action against the Bank under Rule 23(b)(2), id., at 5-6, which authorizes class actions where a defendant acted “on grounds that apply generally to the class, so that injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole,” FRCP Rule 23(b)(2). In certifying the class action, the district court held that “[i]njunctive and declaratory relief are available under TILA,” id., at 6 (citation omitted). The district court later granted summary judgment in favor of the plaintiff class “and awarded injunctive relief and over $22 million in restitution and disgorgement pursuant to the Declaratory Judgment Act.” Id., at 3. The Eleventh Circuit reversed.
The Eleventh Circuit primarily addressed whether “private injunctive relief” is available under TILA: it noted that TILA is silent on the issue, neither expressly authorizing such relief nor prohibiting it, and that the district court “inferred from TILA’s silence that TILA provides private injunctive relief.” Christ, at 8. Based on its detailed analysis, the Circuit Court disagreed. See id., at 8-12. The Eleventh Circuit then held that certification of a Rule 23(b)(2) class action was inappropriate because the Declaratory Judgment Act, standing alone, would not support such an order. Id., at 12. The Court explained, “The relief sought under the Declaratory Judgment Act is essentially a declaration of liability under TILA, and can only ‘lay the basis for a damage award rather than injunctive relief.’” Id. (citation omitted). Accordingly, because it held that TILA did not authorize private injunctive relief, the Eleventh Circuit vacated the class action certification order. Id.
Class Action Claims Against Merrill Lynch Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Pension Manager Lawsuit Constituted “Covered Class Action” under SLUSA Eleventh Circuit Holds
Plaintiff, a quasi-governmental agency that manages pension funds for armed forces personnel, filed a putative class action in Florida state court against Merrill Lynch alleging violations of various Florida state laws; it filed separate class action lawsuits against Lehman Brothers and against Pension Fund of America (PFA). Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 2008 WL 4723777, *1-*2 (11th Cir. 2008). According to the class action complaint, plaintiff was solicited by Pension Fund of America (PFA) to deposit pension funds with Merrill Lynch in a retirement trust account; believing PFA was the agent of Merrill Lynch, plaintiff invested almost $8 million in PFA through Merrill, id., at *2. The class action alleged further that PFA was carrying out an embezzlement and money laundering scheme, and at the time the class action was filed PFA could not account for almost $3 million of the funds plaintiff invested in it through Merrill Lynch. Id. Defense attorneys moved to dismiss the class action on the grounds that plaintiff’s claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA); plaintiff opposed dismissal, arguing that the class action complaint was not a “covered class action” within the meaning of SLUSA. Id., at *3. The district court granted the motion and dismissed the class action. Id. The Eleventh Circuit affirmed.
The Eleventh Circuit explained that “[t]he central question presented on appeal is whether [SLUSA] bars [plaintiff] from pursuing state law claims against Merrill Lynch & Co. and its affiliates for their role in a fraud committed on [plaintiff] by [PFA], a non party to this action.” Instituto, at *1. The Circuit Court summarized the class action as one that arose out of PFA’s theft of funds that it was supposed to have invested, and that sought to hold Merrill Lynch liable under Florida state law for PFA’s fraud “because it allowed PFA to hold itself out as Merrill Lynch’s agent, and because it failed to stop PFA from misappropriating [plaintiff’s] funds.” Id. However, “Congress enacted the Securities Litigation Uniform Standards Act to ensure that securities fraud class actions were brought under federal law.” Id. The district court granted the defense motion to dismiss because it found plaintiff’s class action was a “covered class action” within the meaning of SLUSA. Id. The Circuit Court focused its analysis on whether that determination was correct, see id., at *4, and concluded that it was, id., at *6. The Eleventh Circuit further held that each of the four elements required for SLUSA preclusion had been met by Merrill Lynch. See id., at *6-*10.
To assist class action defense attorneys anticipate the types of cases against which they will have to defend in California, we provide weekly, unofficial summaries of the legal categories for new class action lawsuits filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the preceding week. This report covers October 24 - 30, 2008, during which time 53 new class action lawsuits were filed. Class actions alleging employment-related claims generally top the list of the new class action filings by a wide margin. This past week, 25 of the new class actions alleged labor law claims, representing 47% of the total number of new class actions filed. The only other categories that satisfied the 10% threshold involved class action lawsuits alleging unfair business practice claims, which include false advertising claims, with 12 new filings (23%), and class action lawsuits alleging violations of California's Song-Beverly Act, with 6 new filings (11%).