MAJOR DEVELOPMENTS IN CLASS ACTION LITIGATION: 2017 IN REVIEW AND WHAT TO WATCH IN 2018

By Anthony D. Gill, Keara M. Gordon, Isabelle Ord and David A. Priebe

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The year 2017 saw a number of important developments in class action litigation. In this review and forecast, we look at these events and then consider key issues to watch in 2018.

IMPORTANT DEVELOPMENTS IN 2017 INCLUDE:

■ further consideration of standing after remand in Spokeo

■ continued disagreements among courts over ascertainability requirements

■ US Supreme Court consideration of multiple procedural questions

■ a rare win defeating the fraud-on-the-market presumption

■ legislative activity that defeated the Consumer Financial Protection Bureau’s proposed rule banning mandatory arbitration in consumer financial services contacts and

■ new proposed Fairness in Class Action legislation that would revamp significant aspects of class certification and procedure under Rule 23 of the Federal Rules of Civil Procedure.

STANDING AFTER SPOKEO

By now, everyone is aware of the US Supreme Court’s 2016 landmark ruling in Spokeo, Inc. v. Robins, which held that “Article III standing requires a concrete injury even in the context of a statutory violation.” The Court clarified that even when “a statute grants a person a statutory right” that “does not mean that a plaintiff automatically satisfies the injury-in-fact requirement” of Article III. “[A] bare procedural violation, divorced from any concrete harm” would not satisfy the injury-in-fact requirement. Rather, a plaintiff must demonstrate a “concrete” and “real,” as opposed to “abstract” injury, although the Court stopped short of requiring a plaintiff to demonstrate actual damages. The Supreme Court remanded Spokeo to the Ninth Circuit for reconsideration. (See our alert about Spokeo.)

In the wake of Spokeo, defendants across the country raised standing challenges where plaintiffs alleged no more than a bare statutory violation. In response, the lower courts have struggled to consistently apply Spokeo’s analysis, yielding inconsistent results.

One of the most significant 2017 contributions to this developing conversation was the Ninth Circuit’s remand decision in Spokeo. There, a unanimous three-judge panel of the Ninth Circuit held that the plaintiff, Robins, had sufficiently pled a concrete harm as a result of his alleged injury under the Fair Credit Reporting Act (FCRA). First, the Ninth Circuit held that the FCRA protects concrete interests that are “real, rather than purely legal creations” and those interests bear a “close relationship” to harms traditionally protected by Congress. Second, the Court found Robins had suffered a concrete injury

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because the alleged inaccuracies in Robins’s credit report were not “mere technical violations” of the statute, but of a “type that may be important to employers or others making use of a consumer report.” While acknowledging not all violations of the FCRA may give rise to standing, the Ninth Circuit held Robins’s alleged injuries were “sufficiently concrete.” Spokeo appealed the Ninth Circuit’s August 2017 ruling, but the Supreme Court denied review in January 2018.

While the Supreme Court denied review in Spokeo, it may be called upon to provide additional guidance as a result of a developing circuit split. In the past year, the Second and Seventh Circuits affirmed dismissal of actions under the Fair and Accurate Credit Transactions Act (FACTA) and FCRA, respectively, and the Ninth and the Third Circuit are considering the issue under FACTA. The Third, Eleventh and DC Circuits have found standing existed for claims under the Telephone Consumer Protection Act, FCRA and various state-law consumer protection statutes under limited circumstances. At the district court level, trends are beginning to emerge among the various statutes that have been challenged under Spokeo. For example, district courts appear to be dismissing FACTA cases for lack of standing at comparatively higher rates. This is an area of the law that will continue to evolve and be fluid in 2018.

ASCERTAINABILITY

Ascertainability continues to be a hotly litigated topic in class actions. Although there is no formal ascertainability requirement in Federal Rule of Civil Procedure 23, it is well accepted that a class must be defined using objective criteria. Courts have rejected class definitions that were too vague or subjective, or when class membership was defined in terms of success on the

merits − what is commonly called a “fail-safe” class. In such cases, the class is not “ascertainable.”

Courts disagree, however, about whether a plaintiff class should be required to demonstrate that there is a “reliable and administratively feasible” mechanism for identifying each individual that falls within the class definition. This is often referred to as a “heightened” ascertainability requirement. Satisfying heightened ascertainability can be a particular challenge for plaintiffs in consumer class actions where it may be difficult to prove that an individual plaintiff bought a particular product or used a particular service.

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The Third Circuit has been the leading voice supporting a heightened ascertainability requirement in class actions, and it continued that role in 2017. The Third Circuit has reasoned that this heightened standard is proper because “it allows potential class members to identify themselves for purposes of opting out of a class,” “it ensures that a defendant’s rights are protected by the class action mechanism” by identifying who is bound by a final judgment, and “it ensures that the parties can identify class members in a manner consistent with the efficiencies of a class action.”

In contrast, the Ninth and Second Circuits issued opinions in 2017 that joined the Eighth, Seventh and Sixth Circuits in rejecting an explicit administrative feasibility requirement for ascertainability. These courts have declined to impose a heightened ascertainability requirement for several reasons: they believe manageability concerns should not be a basis for denying class certification; heightened ascertainability would impose an unfair and unnecessary burden on plaintiffs in consumer class actions; and existing procedures under Rule 23 are sufficient to protect the rights of both class members and defendants.

The Supreme Court has not addressed this split, and, until it does, lower courts will continue to face arguments regarding the proper scope of ascertainability.

SIGNIFICANT SUPREME COURT DECISIONS

Personal jurisdiction over nonresident class members is new battleground

In June 2017, the Supreme Court issued its decision in Bristol-Myers Squibb Co. v. Superior Court of California, San Francisco County, rejecting an expansive view of specific personal jurisdiction in a mass action filed in California. In Bristol-Myers, more than 600 plaintiffs, only 86 of whom were California residents, asserted a host of California-state law claims alleging a drug manufactured by BMS called Plavix had damaged their health. BMS moved to dismiss the nonresident-plaintiffs’ claims for lack of personal jurisdiction, but the California Supreme Court found specific jurisdiction did exist because BMS as a whole had extensive contacts with California, even if none of those contacts related to the nonresident-plaintiffs’ use of Plavix.

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The Supreme Court reversed, emphasizing that federalism, as enforced through the Fourteenth Amendment’s Due Process Clause, restricts the limits of state sovereignty and specific jurisdiction must be based on an affiliation between the forum and underlying controversy. The court held that personal jurisdiction for the nonresident plaintiffs could not be based on the fact that certain California residents had suffered the same harm: “[A] defendant’s relationship with a third party, standing alone, is an insufficient basis for jurisdiction.” Because the nonresident-plaintiffs’ claims had no connection with California, they were unable to assert personal jurisdiction over BMS.

Although Bristol-Myers was decided in the context of a mass action, there are potentially significant implications for class actions. Justice Sonia Sotomayor, writing in dissent, highlighted the jurisdictional hurdle plaintiffs may face under the Court’s opinion. She noted that the decision would eliminate nationwide mass actions in any state other than where a defendant is “at home” and subject to general personal jurisdiction. In a footnote, Justice Sotomayor noted that the Court did not “confront the question” of whether its opinion would apply to class actions.

Lower courts have since issued divergent rulings about whether Bristol-Myers applies to class actions. Some courts have dismissed the claims of nonresident class members for lack of personal jurisdiction. One district court in Arizona, for example, opined in a motion to dismiss ruling that it would not be able to certify a nationwide class because it did not have personal jurisdiction over claims of plaintiffs “with no connection to Arizona.” Other district courts, however, have highlighted the procedural differences between a mass action and a class action, and held that Bristol-Myers has no effect on nonresident class members so long as

the named plaintiffs can establish personal jurisdiction over the defendant. A district court in California cut a middle line, rejecting a challenge to personal jurisdiction because all named plaintiffs in a class action were California residents.

This area of the law will continue to develop and is one to watch closely in 2018.

Plaintiffs cannot circumvent Rule 23(f) standards for interlocutory review of class certification decision through dismissal

In Microsoft Corp. v. Baker, the Supreme Court ruled that class action plaintiffs cannot voluntarily dismiss their complaint and then seek an immediate appeal of a class certification ruling, eliminating a tactic plaintiffs had used to skir t the standards on interlocutory review of class certification decisions under Federal Rule of Civil Procedure 23(f ). (See our alert about this decision.)

Prior to Rule 23(f ), a party could only obtain an interlocutory review of such decisions by petitioning the district court and then the appellate court for a discretionary appeal under 28 U.S.C. §1292(b), which is rarely granted. Rule 23(f ) was enacted in 1998 to create a new avenue for obtaining interlocutory review. Under Rule 23(f ), a party need only petition the appellate court for permission to appeal. The appeals court has broader discretion to take up the appeal than it has under §1292(b), although courts have fashioned limits on the exercise of their discretion based on the guidance accompanying Rule 23(f ) as enacted. If the appellate court denies the Rule 23(f ) petition, a party must wait until a final judgment in the case to obtain review of the class certification ruling and any other pre-judgment decisions.

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In Baker, the plaintiffs’ class allegations were struck by the district court, and the Ninth Circuit denied a Rule 23(f ) petition. Rather than litigate the case to its termination, plaintiffs moved voluntarily to dismiss their complaint with prejudice. The defendant stipulated to the dismissal, but maintained the plaintiffs had no right to appeal the striking of the class allegations (as plaintiffs claimed they had), and the district court granted the dismissal. The plaintiffs then appealed to the Ninth Circuit, which held that it had jurisdiction over the appeal because the stipulated dismissal was “sufficiently adverse” to be a final decision for which appeal exists as a matter of right under the general appellate jurisdictional statute, 28 U.S.C. §1291. The Ninth Circuit then ruled the district court had improperly struck the class allegations and remanded for further proceedings.

The Supreme Court reversed, holding the Ninth Circuit did not have jurisdiction to hear the appeal because the plaintiffs’ voluntary dismissal cannot be considered a “final decision” under 28 U.S.C. §1291. “From the very foundation of our judicial system,” the Court wrote, “the general rule has been that the whole case and every matter in controversy must be decided in a single appeal.” The Court found that the plaintiffs’ tactic of dismissing their complaint ran contrary to this rule because (1) it would lead to protracted litigation with piecemeal appeals; (2) it upset the balance created by Congress under Rule 23(f ) between allowing interlocutory review of certification decisions under certain standards and waiting to consider all issues in a case after final judgment; and (3) it was one-sided because it only permitted plaintiffs to force an appeal and not defendants (since a defendant cannot voluntarily dismissal a plaintiff ’s case). As a result of the Supreme Court’s ruling, this strategy should no longer be available to plaintiffs.

Class action tolling does not affect statutes of repose

In California Public Employees’ Retirement System v. ANZ Securities, Inc., the Supreme Court ruled that so-called class action tolling cannot save claims alleging violations of Section 11 of the 1933 Securities Act that were filed beyond the statute’s three-year statute of repose. In so doing, the Supreme Court placed an important limit on American Pipe & Construction Co. v. Utah and its progeny, in which the Supreme Court established that the statute of limitations for absent class members is tolled during the pendency of a putative class action until class certification is denied or the case is otherwise resolved. Under certain circumstances, absent class members take advantage of the tolled limitations period by filing their own lawsuits based on the same facts as the first action, which would otherwise be untimely.

Claims under Section 11 of the 1933 Securities Act are subject to two limitations periods: a one-year statute of limitations and a three-year statute of repose. The statute of repose states: “In no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public.” The plaintiff in this case, CalPERS, was an unnamed class member in a class action lawsuit against Lehman Brothers. More than three years after the relevant transactions occurred, CalPERS filed its own lawsuit against Lehman with identical allegations to the pending class action. When the class action lawsuit settled, CalPERS opted out of the settlement to pursue its own recovery. The Supreme Court held, however, that CalPERS’s separate action was untimely. The Court held that a statute of repose “effect[s] a legislative judgment that a defendant should be free from liability after the legislatively determined period of time” and was not tolled by the previous class action lawsuit.

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The Court distinguished between legislatively-enacted and equitable tolling rules. Where the legislature enacts a general tolling rule, the Court held that lower courts must analyze the legislative intent of the statute of repose and tolling rule to determine which one controls. In contrast, the Court held that statutes of repose are not subject to equitable tolling. Because the tolling doctrine announced by American Pipe is based on equitable principles, the Court held it could not toll the 1933 Securities Act’s statute of repose.

This decision has several significant implications. First, statutes of repose appear in numerous federal and state statutes, many of which are the subject of class action litigation. Lower courts will be required to determine when analogous statutes of repose cannot be tolled. Second, this decision may cause plaintiffs to intervene or file protective actions to ensure the statute of repose does not run should they wish to file their own lawsuit. It is impossible to predict how often this will happen and it will likely be limited to sophisticated plaintiffs, but may add to the administrative burdens of class action defendants. Finally, courts may require class counsel to take additional steps to protect class members’ rights. Justice Ruth Bader Ginsburg, writing in dissent, called it “incumbent” on class counsel to notify class members about the “consequences of failing to file a timely protective claim,” in light of the Court’s holding.

Viability of class action waivers in employment agreements

In October 2017, the Supreme Court heard oral argument on a consolidated appeal of three cases on the issue of whether the National Labor Relations Act (NLRA) precludes class action waivers in mandatory employment arbitration agreements. At issue is Section 7 of the NLRA, which gives employees the right to engage in “concerted activities for the purpose of

collective bargaining or other mutual aid or protection.” Section 8 of the NLRA prohibits any practice by an employer that restrains the rights under Section 7. In each of the consolidated appeals, employees were required to agree that as part of their employment any wage-and-hour claims could only be brought through individual arbitration and to waive the right to participate in any class or collective action.

In two of the consolidated appeals, the Seventh and Ninth Circuits held that employer’s restrictions on class or collective actions in employment agreements violated Section 7 of the NLRA. Furthermore, these courts concluded that the Federal Arbitration Act (FAA) did not override the NLRA and require the employees to

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arbitrate their claims. The Seventh Circuit held that the FAA does not require courts to enforce agreements that are invalid at law under the statute’s “savings clause,” and because a restriction on collective actions is illegal under the NLRA, the FAA and NLRA are not in conflict.

In contrast, the third consolidated appeal from the Fifth Circuit found the FAA does support class action waivers in employment agreements. The Fifth Circuit held that requiring the availability of class actions “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.” As a result,

and relying on past Supreme Court precedent, the Fifth Circuit held that requiring a class mechanism is a detriment to arbitration and violates the FAA, and as a result the savings clause in the NLRA is inapplicable.

Under this framework the Court also analyzed and rejected the argument that the NLRA contained a congressional command to override the FAA. The Second and Eighth Circuits have likewise ruled that the NLRA does not void class action waivers.

A decision from the Supreme Court is expected before the end of its current term in June 2018.

Previewing next term: Supreme Court agrees to revisit limits of American Pipe tolling on successive class actions

On December 8, 2017, the Supreme Court granted certiorari in Resh v. China Agritech, Inc., to resolve the question of whether plaintiffs can take advantage of American Pipe tolling to bring successive class action lawsuits regarding the same subject matter.

American Pipe tolls the statute of limitations during the pendency of the class action until certification is denied. Courts agree that absent class members may use this tolling to file subsequent individual − not class − lawsuits after certification is denied. The Circuits are split, however, about whether absent class members can rely on American Pipe tolling to file a new class action. Prior to Resh, the Sixth and Seventh Circuits had extended American Pipe to successive class actions, while the First, Second, Third, Fifth, Eighth and Eleventh Circuits permitted tolling only for successive individual actions.

In Resh, the Ninth Circuit held that tolling extends to class actions. The Resh lawsuit was the third class action filed against China Agritech, Inc., alleging securities fraud under federal securities statutes. A district court judge had denied certification in two prior actions, the first

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of which was settled by the individual plaintiffs and the second of which was voluntarily dismissed. Nine months after certification was denied in the second case, and three years and three months after the first lawsuit was filed, Resh filed a third putative class action lawsuit. The judge dismissed the lawsuit as untimely under the applicable two-year statute of limitations, holding that while an individual suit would be timely, tolling did not apply to permit a third class action lawsuit.

The Ninth Circuit reversed. In part, the court followed an earlier decision from the same judge, Catholic Social Services, Inc. v. Immigration & Naturalization Serv., 232 F.3d 1139 (9th Cir. 2000) (en banc). The court held that permitting absent class members to file new class action lawsuits where class certification was denied in a prior suit “would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” In addition, the court held that “the current legal system is adequate” to respond to any concern regarding abusive, repetitive filings. The court believed that plaintiffs’ counsel working on contingency would not file repetitive lawsuits with a low likelihood of success and that “ordinary principles of preclusion and comity” will further reduce incentives to file frivolous lawsuits.

The case will be heard during the Supreme Court’s term that begins in October 2018. At stake for defendants is the prospect of defending multiple repetitive class actions on the same subject, even after defeating class certification, which could drive companies to settle cases on a class-wide basis to avoid the threat of continued litigation in what the US Chamber of Commerce called “zombie cases.”

That being said, the ANZ Securities case discussed above should temper this risk for causes of action that have a statute of repose in lieu of or in addition to a statute of limitations. As American Pipe cannot toll the statute of

repose, neither an individual nor a class action may be filed if certification is denied after the statute of repose has expired.

RARE WIN DEFEATING FRAUD-ON-THE-MARKET PRESUMPTION IN SECURITIES CLASS ACTIONS

Late last year, a district court in the Northern District of California denied class certification in a securities fraud lawsuit under Section 10(b) of the Securities Exchange Act of 1934, holding that the defendants had overcome the fraud-on-the-market presumption of reliance and thus predominance under Rule 23(b)(3) had not been established. In re Finisar Corp. Sec. Litig., Case No. 11-01252, 2007 WL 6026244 (N.D. Cal. Dec. 5, 2017) (Davila, J.). DLA Piper LLP (US) represents the defendants in this case.

The fraud-on-the-market theory “facilitates class certification by recognizing a rebuttable presumption of class wide reliance on public, material misrepresentations when shares are traded in an efficient market.” Without the presumption, individual issues of reliance would typically overwhelm common issues. To invoke the presumption, a plaintiff must show, among other things, that a security trades in an efficient market. A defendant can then rebut the presumption by showing on a preponderance of the evidence that the alleged misrepresentation had no impact on the market price of the security.

Finisar develops and sells fiber optic subsystems and components for telecommunications. The plaintiff alleged that Finisar did not comment on a perceived risk to its revenue from high inventory levels held by certain customers, until Finisar’s CEO allegedly denied this factor at a December 2, 2010 third-party conference. On March 8, 2011, Finisar issued a press release that

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fourth-quarter revenue would fall below analysts’ expectations due in part to inventory build-up at certain customers. The plaintiff alleged this was a corrective disclosure that caused Finisar’s common stock to decline by 39 percent. The defendants did not dispute that Finisar stock trades in an efficient market.

In opposition to class certification, Finisar submitted an expert report which found that the December 2, 2010 statement did not have a statistically significant impact on Finisar’s stock price at any point in time on either December 2 or 3 when adjusted for general market and industry trading. Finisar also distinguished cases that allow for price impact when an alleged misstatement does not cause a price increase as ones in which the stock price already was inflated prior to the statement due to the market’s erroneous view of the issuer, which the misstatement then confirmed so as to maintain the pre-existing inflation. Finisar further submitted evidence that analyst reports issued after the December 2 statement, which the plaintiff alleged caused the stock price to increase, provided new information to the market about customer inventories and did not incorporate the December 2 statement.

The court agreed with Finisar and found that the absence of a price impact “sever[ed] the link” between the CEO’s statement and the price paid by the putative class for Finisar’s stock, thus rebutting the presumption of reliance. As a result, the Court found the plaintiff had failed to establish predominance and denied class certification.

To our knowledge, this is only the second time a court has denied class certification in full in a securities fraud class action involving securities trading in an undisputedly efficient market since the Supreme Court’s ruling in Halliburton Co. v. Erica P. John Fund, Inc. 134 S. Ct. 2398

(2014). The plaintiff has filed a petition seeking Rule 23(f ) review, which defendants have opposed.

LEGISLATIVE DEFEAT OF ARBITRATION AND CLASS ACTION WAIVER BAN FOR CONSUMER FINANCIAL SERVICES CONTRACTS

One of the most high-profile and controversial actions by the Consumer Financial Protection Bureau in recent years was its passage of a rule that would have barred mandatory arbitration agreements and class action waivers in the consumer financial consumer products and services sector. These mandatory arbitration clauses, favored by many banks and financial services companies, require consumers to resolve disputes by individual private arbitrations rather than by class action lawsuits.

On October 24, 2017, the US Senate voted to nullify the arbitration rule by a vote of 50 to 50, with Vice President Mike Pence casting the tie-breaking vote. This vote kills the arbitration rule and prohibits the CFPB from enacting a similar rule in the future, leaving intact the ability to require consumers individually to arbitrate disputes arising from financial services contracts.

THE FAIRNESS IN CLASS ACTION LITIGATION ACT

Another piece of legislation, the proposed Fairness in Class Action Litigation Act of 2017, passed the House in March 2017 and is pending in the Senate. The Act would make several significant substantive changes to the elements of class certification, including a requirement that:

1. “each proposed class member suffer[] the same type and scope of injury as the named class representative”

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2. plaintiffs establish “a reliable and administratively feasible mechanism” to identify class members and to distribute monetary relief and

3. prohibiting certification where a class representative is a relative or employee of the plaintiffs’ counsel.

In addition, the Act would make several procedural changes, including:

1. permitting an immediate appeal as of right from any decision under Rule 23

2. staying discovery during motions to dismiss or to strike class allegations

3. requiring named plaintiffs to disclose in the complaint any relationship with class counsel and to “describe the circumstances under which each class representative or named plaintiff agreed to be included in the complaint”

4. prohibiting the payment of plaintiffs’ attorneys’ fees until the distribution of monetary relief to the class is complete and

5. prohibiting class counsel from receiving attorneys’ fees greater than that distributed and received by all class members.

While these proposed changed have potentially significant ramifications for class actions, which, if any, of these proposals will ultimately be enacted into law is uncertain and the propriety of each continues to be the subject of much debate.

DLA Piper is a global law firm operating through DLA Piper LLP (US) and affiliated entities. For further information please refer to www.dlapiper.com. Note past results are not guarantees

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ABOUT OUR CLASS ACTIONS PRACTICE

Class action lawsuits are filed with increasing frequency in today’s business world. Everything from a natural disaster to a company merger to an everyday event like an advertisement for a new consumer product may serve as the trigger. These cases may involve thousands, even millions of putative plaintiffs in numerous jurisdictions within the US and even globally – seeking millions or billions of dollars in damages or injunctive relief that may strike at the heart of your company’s business.

As your business defends itself against these lawsuits, you may find yourself simultaneously managing curious regulators and aggressive legislators, in addition to the plaintiffs’ lawyers. In this high-stakes atmosphere, DLA Piper, with over 100 class action lawyers across the United States can help. Find out more by contacting:

Keara M. GordonCo-Chair, Class Action Litigation GroupNew YorkT +1 212 335 4632keara.gordon@dlapiper.com

Isabelle OrdCo-Chair, Class Action Litigation GroupLos AngelesT +1 213 330 7700San FranciscoT +1 415 836 2536isabelle.ord@dlapiper.com

David A. PriebeSilicon Valley+1 650 833 2056Sacramento+1 916 930 3270david.priebe@dlapiper.com

Anthony GillWashington, DCT +1 202 799 4562New YorkT +1 202 799 4562anthony.gill@dlapiper.com