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Ninth Circuit Affirms Important Distinction Between Settlement and Litigation Classes

Client Alert

Authors: Howard M. Privette, Lindsay D. Breedlove and Michael J. Hartman

6/27/2019
Ninth Circuit Affirms Important Distinction Between Settlement and Litigation Classes

An en banc Ninth Circuit recently reinstated a nationwide class settlement that resolved consumer claims related to several of Hyundai’s and Kia’s advertised fuel economy standards. Joining several other circuits, the court in In re Hyundai and Kia Fuel Economy Litigation clarified that, while a district court must be concerned with manageability issues in considering whether to certify a litigation class, manageability is not a concern in certifying a settlement class for which, by definition, there will be no trial. Thus, a class that is not certifiable for litigation on the merits may nevertheless be certifiable for purposes of settlement when the settlement obviates the need to litigate issues that would otherwise render the litigation unmanageable.

A critical component of the court’s decision was its determination that the proponents of a settlement class are not obligated to survey the consumer protection laws of all 50 states in order for the trial court to assess whether differences in the state laws might swamp the issues common to the class and thus defeat the predominance requirement of Rule 23(b)(3) of the Federal Rules of Civil Procedure. The en banc opinion overturned a split panel’s controversial 2018 decision to the contrary that many believed would deal a “major blow” to parties’ ability to effect multistate class settlements. In doing so, the court laid the groundwork for courts in the Ninth Circuit to again look favorably on appropriate class action settlements, notably without impinging on defendants’ rights to contest class certification outside the settlement context.

Background

The class settlement at issue resolved several putative class action consumer complaints filed across the country alleging that the plaintiffs paid too much for cars made by Hyundai and Kia based on inaccurate fuel economy information. The plaintiffs in the first-filed case, which was pending in the Central District of California, moved to certify a litigation class. The district court issued a tentative ruling indicating that material differences among state laws would prevent certification of a nationwide class, but did not issue a final ruling. While that motion was pending, the automakers announced downward adjustments to fuel economy estimates and the creation of a lifetime reimbursement program to compensate vehicle owners and lessees. This prompted the filing of additional putative class actions across the country, with the federal lawsuits consolidated into a single multidistrict litigation.

The automakers and the putative California class plaintiffs soon thereafter proposed a nationwide settlement in which car purchasers could choose to be reimbursed for their alleged overpayment via one of four methods, including the newly established lifetime reimbursement program. Despite its prior tentative ruling, the district court approved the settlement without analyzing whether differences among state laws would preclude a finding that common issues predominated under Rule 23(b)(3). On appeal, objectors challenged, among other things, that variations in state law defeated predominance.

A divided panel of the Ninth Circuit credited these objections and reversed the district court’s approval of the settlement. The majority panel opinion held that parties seeking to settle a multistate class action in the Ninth Circuit would now be required to undertake an intensive and burdensome 50-state analysis of consumer protection laws before obtaining certification of the settlement class — a requirement that commentators called “unworkable.”

En Banc Opinion

The Ninth Circuit agreed to review the case en banc and ultimately reinstated the class settlement. Relying heavily on the Supreme Court’s opinion in Amchem Products v. Windsor, 521 U.S. 591 (1997), the majority highlighted the important differences between settlement classes and litigation classes. Although a court may not find that the Rule 23(b)(3) predominance element can be met based solely on a common interest in settlement benefits, evaluating whether to certify a settlement class must necessarily take into account the effects of that settlement. Slip op. at 36. Specifically, when a proposed settlement eliminates the need for trial, it obviates the need to litigate individualized issues that would make such a trial unmanageable. Id. Thus, in evaluating whether a settlement-only class satisfies the predominance requirement, the Ninth Circuit explained, ‘“a district court need not inquire whether the case, if tried, would present intractable management problems.’” Id. at 35 (quoting Amchem, 521 U.S. at 620). Nevertheless, by juxtaposing settlement and litigation classes in this manner, the court reaffirmed that thorough consideration of these manageability issues must still be part of the rigorous Rule 23 analysis applicable to litigation classes.

With the distinction between settlement and litigation classes in mind, the en banc court rejected the objectors’ argument that the district court erred by failing to address variations in state law in the settlement context. The court explained that “[s]ubject to constitutional limitations and the forum state’s choice-of-law rules, a court adjudicating a multistate class action is free to apply the substantive law of a single state to the entire class.” Id. at 42. In the instant case, no party argued that California’s choice-of-law rules should not apply to the proposed settlement, which arose from a multidistrict litigation pending in a California court. The en banc court noted that California courts by default apply California law unless a litigant timely invokes the law of another state. Id. In the present case, then, there was no reason to consider another state’s law unless and until an objector raised the issue, in which case “it is ‘the foreign law proponent’ [the objector] who must ‘shoulder the burden of demonstrating that the foreign law, rather than California law, should apply to class claims.’” Id. (quoting Wash. Mut. Bank, FA v. Superior Court, 15 P.3d 1071, 1080-81 (Cal. 2001)).

To satisfy such a burden under California law, the en banc court explained that an objector must satisfy California’s three-point governmental interest test, requiring the objector to prove in the district court that (1) the law of the foreign state materially differs from the law of California; (2) a true conflict exists, meaning that each state has an interest in the application of its own law to the circumstances of the particular case; and (3) the foreign state’s interest would be more impaired than California’s interest if California law were applied. Id. at 43-44 (quotations and citations omitted). Here, because no objector argued that differences in consumer protection laws of all 50 states precluded certification, “neither the district court nor class counsel were obligated to address choice-of-law issues beyond those raised by the objectors” before certifying the settlement class. Id.

In reaching that conclusion, the Ninth Circuit carefully distinguished its earlier decision in Mazza v. American Honda Motor Co., 666 F.3d 581 (9th Cir. 2012), which involved certification of a class for litigation purposes. In Mazza, the court explained, “the foreign law proponent (the defendant) ‘exhaustively detailed the ways in which California law differs from the laws of the 43 other jurisdictions’ and showed how applying the facts to those disparate state laws made ‘a difference in this litigation.’” Slip op. at 45 (quoting Mazza, 666 F.3d at 590-91). Because “the Mazza class was certified for litigation purposes,” the court had to concern itself with “[t]he prospect of having to apply the separate laws of dozens of jurisdictions” at trial, presenting manageability issues that outweighed predominance. Id. at 46. Those same concerns were absent in the context of the fuel economy settlement class.

Dissent

Ninth Circuit Judge Ikuta, who wrote the original majority panel opinion in the fuel economy case, dissented from the en banc opinion and was joined by two other Ninth Circuit judges. The dissent criticized the district court for failing to engage in a choice-of-law analysis and for concluding that variations among state laws could be addressed as part of a final fairness hearing under Rule 23(e). Judge Ikuta argued that the fact that the district court tentatively reached the conclusion that variations among state laws would prevent certification of a litigation class should have led it to examine whether those same variations also impacted a settlement class. The fact that this rationale did not carry the day underscores the en banc majority’s conclusion that certification of a settlement class may be appropriate even if certification would not be appropriate in the same case for a litigation class.

Implications

  • Proponents of nationwide settlement classes do not need to undertake an intensive survey of potential variations among state laws that might raise predominance questions if the case were to be litigated on the merits. Following the Ninth Circuit’s en banc opinion, the burden to demonstrate the existence and relevance of any such variations in the context of a settlement rests squarely with objectors who might raise the issue.

  • The Ninth Circuit’s finding that variations in state law do not necessarily prevent the certification of settlement classes may assist parties in crafting other nationwide class settlements.

  • Defendants opposing class certification in contested cases remain free to invoke the heightened standards applicable to certification of litigation classes, including the effect of variations of state law with respect to manageability of cases, and courts evaluating such litigation classes must continue to undertake the same “rigorous analysis” of such issues that has dominated recent class jurisprudence.

  • The en banc opinion may help allay concerns among district courts in the Ninth Circuit concerning the propriety of nationwide consumer class actions settlements, which would once again encourage negotiated resolutions of such cases.

Howard M. Privette is a partner in Pepper Hamilton’s Trial and Dispute Resolution Practice Group, a seasoned and trial-ready team of advocates who help clients analyze and solve their most emergent and complex problems through negotiation, arbitration and litigation. Lindsay D. Breedlove is a partner and Michael J. Hartman is an associate in the firm’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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