NEGATIVE VALUE CLAIMS: RECENT DEVELOPMENTS AND STRATEGIES, BY DAVID LAUFER

Armed with the class action mechanism, lawyers have recovered billions of dollars for class members, and billions of dollars for themselves. As with any activity where potentially billions of dollars are at stake, all is not well with the class action device. To address class action abuses, Congress enacted the Class Action Fairness Act (CAFA) in 2005, 28 U.S.C. §§1332(d), 1453, and 1711-1715, to “curb perceived abuses of the class action device.” (Tanoh v. Dow Chem. Co. (9th Cir. 2009) 561 F.3d 945, 952.)

Of particular concern are settlements where claimants receive little or no compensation for valid claims. 57-89 percent of class actions are resolved by a stipulated judgment according to recent research.

This article discusses recent developments in retail class actions and risk management strategies to reduce the costs of resolving these actions.

Standing Under State Unfair Competition and Advertising Laws

In re Hinojos v. Kohl Corp. (9th Cir. 2013, No. 11–55793); 2013 WL 2159502:

Plaintiff alleged that Kohl’s falsely advertised “on sale” discount prices for goods, but instead charged its regular prices in violation of California’s Unfair Competition Law (UCL), Bus. & Prof. Code §17200 et seq; Fair Advertising Law (FAL), Bus. Prof. Code §17500 et seq; and Consumer Legal Remedies Act (CLRA), Civ. Code §1750 et seq. Kohl’s removed the action to federal court pursuant to the CAFA. The District Court dismissed all claims, determining that Hinojos did not have standing. It held that Hinojos had acquired the merchandise he wanted at the price advertised, and entered judgment for Kohl’s.

Following that dismissal, the California Supreme Court reviewed the standing requirement of the UCL, FAL, and CRLA in Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 330. It held that when a defendant makes a false and material misrepresentation to induce a consumer to purchase its product, there is an economic injury supporting standing. In Kwikset, the plaintiff alleged it would not have purchased defendant’s lock set had it known it was not “made in the U.S.A.”

As a result of Kwikset, the Court of Appeals reversed the Hinojos dismissal:

Hinojos has done everything Kwikset requires to allege an economic injury under the UCL and FAL. He alleges that the advertised price discounts conveyed false information about the goods he purchased, i.e., that the goods he purchased sold at a substantial price at Kohl’s in the recent past and/or in the prevailing market. He also alleges that he would not have purchased the goods in question absent this misrepresentation. This is sufficient under Kwikset…In sum, price advertisements matter. Applying Kwikset in a straightforward manner, we hold that when a consumer purchases merchandise on the basis of false price information, and when the consumer alleges that he would not have made the purchase but for the misrepresentation, he has standing to sue under the UCL and FAL because he has suffered an economic injury.

Copycat Class Actions

Thorogood filed a putative class action for consumers in 29 jurisdictions under laws prohibiting misleading advertising and unfair labeling. He alleged that Sears misled consumers to believe that Kenmore clothes dryer drums were 100 percent stainless steel when a facing on the drum was coated with a ceramic compound and the drum contained “mild” steel that could rust and stain clothes. (Thorogood v. Sears Roebuck & Co. (7th Cir. 2012) 678 F.3rd 546.)

The district court certified the class. The Seventh Circuit reversed class certification, and ultimately the case was dismissed, the dismissal affirmed and certiorari denied.

Sears was frustrated. It filed a motion to enjoin any member of the decertified class and its counsel from filing new actions against Sears.

The district court denied the injunction and Sears appealed. The Seventh Circuit reversed. The U.S.  Supreme Court granted certiorari, vacated the Seventh Circuit’s order and remanded in light of Smith v.  Bayer (2011) 131 S.Ct. 2368 , which held that denial of a class certification motion does not preclude a state court from ruling on a class certification motion filed by a plaintiff who was not a party to the decertified federal class action.

Judge Posner ordered the district court to vacate the injunction barring new actions, commenting, “Sears will have to tread one or more of these paths if it wants relief from this copycat class action and perhaps more such actions to come; we can’t save it.”

Murray v. Sears, Roebuck & Co., No. 09-05744 CW was filed by the lawyers representing Thorogood, on behalf of a putative member of the Thorogood class.  District Judge Wilken allowed the plaintiff to file an amended class action complaint which “includes allegations sufficiently different from the Thorogood complaint.” Murray’s motion for class certification remains under submission.

Attorney Fees in Coupon Settlements

In Re: HP Inject Printer Litigation (9th Cir.2013, no. 11-16097); 2013 WL 1986396.)

Plaintiffs in consolidated class actions alleged that HP marketed and sold printer cartridges by misleading consumers. After five years of aggressive litigation, the parties proposed a stipulated settlement that provided $5,000,000 in e-credit redeemable for printers and supplies at HP’s web site; additional disclosures to remedy the business practices challenged; payment up to $950,000 for class notice and class administrative costs; and up to $2,900,000 in attorney fees and litigation expenses.

Over formal objections, the district court modified and approved the settlement as modified, but the Ninth Circuit reversed because “[u]nder Section 1721 of CAFA, a district court may not award attorneys’ fees to class counsel that are ‘attributable to’ an award of coupons without first considering the redemption value of the coupons. A district court may, however, award lodestar fees to compensate class counsel for any non-coupon relief they obtain, such as injunctive relief.”

Attorney Fees in Attorney General Enforcement Action

In Re Tobacco Cases I (2013) 216 Cal. App.4th 570:

R.J. Reynolds appealed from orders finding the People prevailed in an action to enforce a consent decree that provided for attorney fees to the prevailing party, and awarding contractual attorney fees of  2,943,920.63. The Court of Appeal held that the People were entitled to attorney fees calculated at market rates for the San Francisco Bay Area, where the assistant attorney generals’ offices were, instead of the market rates of attorneys in San Diego where the enforcement action was tried. The Court of Appeal also held it appropriate to compare the fees sought by the Attorney General to the amount the defense attorneys billed.

Retailers’ voluntary Recall and Replacement of Defective Product Bars Class Certification

In Re Aqua Dots Products Liability Litigation (7th Cir. 2011) 654 F.3d 748:

A putative class of purchasers of contaminated children’s toys moved to certify the class. In opposition, defendants submitted evidence that as soon as they learned of the contamination, they published a recall notice, offered to replace the defective toys, and gave refunds to purchasers who demanded them. The District Court denied class certification because the substantial costs of the legal process made a suit inferior to a recall as a means to set things right.

The Court of Appeals affirmed, noting that “[a] representative who proposes that high transaction costs (notice and attorneys’ fees) be incurred at the class members’ expense to obtain a refund that already is on offer is not adequately protecting the class members’ interests..”

Risk Management Strategies for Retailers

Here are several suggestions to explore for reducing the risk of retail class actions:

  1. Modify credit card agreements and expand the arbitration clause to include the retailer.
  2. Identify decision makers who are in control of activities that are likely to cause consumer   complaints, implement accountability metrics and institute in house customer complaint resolution procedures that maintain the customer’s good will.
  3. Monitor retail class actions filed against your competitors; review and change as necessary business practices alleged to be unfair, deceptive, and a violation of law in the competitor’s lawsuit.
  4. Monitor and respond to all pre-litigation notices alleging violation of consumer laws and consider voluntary compliance.
  5. Review a product satisfaction guarantee program that requires notice of any defect or claim of misrepresentation, opportunity to cure, and informal internet-based resolution as a condition precedent to legal actions.
  6. Secure indemnity agreements, become an added insured under all vendors in the distribution, supply and manufacturing chain and purchase advertising, label and packaging insurance.

Conclusion

The myriad substantive laws that plaintiffs allege as violations that catalyze class actions require due diligence in a firm’s distribution and marketing procedures to make management accountable not only for sales but also for the costs of errors resulting in the defense and resolution of class actions.

David Laufer is a former general counsel of a public company now focusing his practice at Burke, Williams Sorensen LLP on class actions, franchise disputes, insurance coverage, Prop 65 and risk management.

Sara Laufer is a demographer researching disparities in justice, and the socioeconomic and health policy implications of hearing loss among the non-elderly population.

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