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FACTA Class Action Defense Cases–Ehrheart v. Verizon Wireless: Third Circuit Court Reinstates Preliminary Approval Of Class Action Settlement Holding Passage Of Clarification Act Did Not Allow Defendant To Withdraw From Settlement Agreement

Verizon’s Decision to Enter into Proposed Class Action Settlement of Class Action Alleging Violation of FACTA (Fair and Accurate Credit Transactions Act) while Clarification Act was Pending before Congress did not Allow Verizon to Back Out of Settlement After Passage of Clarification Act Third Circuit Holds

Plaintiffs filed two putative class actions against Verizon Wireless, one in Pennsylvania and one in Tennessee, alleging that it violated the Fair and Accurate Credit Transactions Act (FACTA), which prohibits merchants in credit or debit card transactions from providing consumers at point of sale with a printed receipt that displays more than the last five digits of the card or its expiration date; specifically, the class action complaint alleged that plaintiffs received a receipt that contained the expiration date of their credit or debit card. Ehrheart v. Verizon Wireless, ___ F.3d ___ (3d Cir. June 15, 2010) [Slip Opn., at 3; Dissenting Opn., at 7-8]. The parties entered into a proposed class action settlement; at the time, the Credit and Debit Card Receipt Clarification Act of 2007 (the Clarification Act) was pending before Congress, and if it passed then plaintiffs’ claims would fail as a matter of law because the Clarification Act insulated merchants from liability for claims based solely on the failure to redact expiration dates during the time period that subsumed plaintiffs’ claims. Slip Opn., at 3-4. The parties moved the district court for preliminary approval of the proposed class action settlement, which the district court granted on April 22, 2008. Id., at 4. The Clarification Act was signed into law on June 22, 2008, and six days later Verizon filed a motion to vacate the approval of the class action settlement. Id. The district court granted Verizon’s motion, and subsequently granted Verizon’s motion for judgment on the pleadings. Id. In vacating its approval of the class action settlement, the district court explained that the Clarification Act applied to any lawsuit that was not yet final and so it applied to the instant class action lawsuit because the proposed class action settlement had not yet received final approval. Dissenting Opn., at 12. “Because Congress eliminated the plaintiffs’ cause of action, the District Court reasoned, it had to vacate its preliminary approval of the Settlement Agreement.” Id. In the district court’s view, “no class action settlement can be fair, adequate or reasonable when Congress has determined that such relief is unfair and unreasonable.” Id., at 13. Plaintiffs appealed, and the Third Circuit reversed.

The Third Circuit explained that “the District Court lost sight of three important points” in granting Verizon’s motion to vacate preliminary approval of the class action settlement: “First, there is a restricted, tightly focused role that Rule 23 prescribes for district courts, requiring them to act as fiduciaries for the absent class members, but that does not vest them with broad powers to intrude upon the parties’ bargain. Second, a strong public policy exists, which is particularly muscular in class action suits, favoring settlement of disputes, finality of judgments and the termination of litigation. Third, our jurisprudence holds that changes in the law after a settlement is reached do not provide ground for rescission of the settlement.” Ehrheart, at 5 (footnote omitted).

With respect to the first issue, the Circuit Court stated that it “ha[d] no doubt that the settlement agreement reached in this case is a binding and enforceable contract under general principles of contract interpretation.” Ehrheart, at 6. Boiled down to its essentials, “Here, the Clarification Act was pending before Congress when the parties negotiated their agreement. In negotiating this agreement, Verizon bet on the certainty of settlement instead of gambling on the uncertainties of future legislative action. Verizon lost, and the District Court erred by letting it replay its hand.” Id., at 8. With respect to the second issue, the district court erred in allowing Verizon to withdraw from the class action settlement “when it became unpalatable” in contravention of public policy “encouraging class action settlement agreements.” Id., at 9. And with respect to the third issue, the Third Circuit held, “Where, as here, the parties have executed an agreement, a party cannot avoid its independent contractual obligations simply because a change in the law confers upon it a benefit that could have altered the settlement calculus.” Id., at 10. Accordingly, the Circuit Court reversed the district court and remanded the matter with instructions to reinstate preliminary approval of the class action settlement and “proceed with the Rule 23 process.” Id., at 12.

NOTE: While the majority opinion is only 12 pages long, Circuit Judge Smith wrote a 30-page dissent in which he argued that passage of the Clarification Act rendered the class action moot. See Verizon Wireless (Smith, J., dissenting). The majority found that the Clarification Act did not render the class action moot as the plaintiffs still had a “personal stake in the outcome” and the district court still had the ability to grant the relief afforded by the proposed class action settlement. See Ehrheart, at 10-12.

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