Federalizing Consumer Suits Through CAFA

11/8/2010 Articles

Federal courts are seeing more class actions and are starting to impose their own procedural rules

For many years, the California state courts were the nearly exclusive venue for class actions brought under state consumer protection laws. Hurdles to federal jurisdiction prevented the removal of most consumer class actions to the federal courts. Virtually no consumer class actions met the requirements of complete diversity and that at least one class representative's claim exceed the $75,000 amount in controversy requirement.

However, in February 2005, the Class Action Fairness Act took effect - enacted in part to discourage forum shopping and enable federal courts to apply uniform procedural standards no matter where an action is brought. It relaxed the requirements for federal jurisdiction over most class actions. Now, federal jurisdiction is proper (with limited carve-outs) where: 1) the class has no fewer than 100 members; 2) the aggregate of all members' claims totals at least $5 million; and 3) minimal diversity exists (only one plaintiff must be diverse from one defendant).

CAFA's effect was immediate: In its first year, the percentage of class actions successfully removed to federal court tripled. The number of class actions filed directly in federal court (perhaps to avoid the delay, expense and effort involved in contesting removal) increased as well. As a consequence, the focus of consumer class action litigation is now moving from state to federal courts.

Increasing Role of Federal Courts

Federal precedent will continue to grow in importance as these trends continue. California trial courts do not issue published opinions, and their decisions are not available for citation. Only when one party appeals a matter will a citable California state opinion result. In contrast, federal district court opinions are widely available online, even if unpublished in the official reporters. Thus, it is now the federal courts, rather than the state courts, that are largely developing the law for consumer class actions arising under state law.

Recent federal opinions reveal a number of emerging issues still being resolved by the courts. CAFA - originally intended as a procedural leveling device - will likely have significant effects on the substantive development of California consumer protection law as more disputes are resolved under federal standards.

Standing and UCL's 'Injury in Fact' Requirement

Prior to November 2004, the Unfair Competition Law (Bus. & Prof. Code §§17200 et seq.) permitted uninjured plaintiffs acting as "private attorneys general" to sue for restitution on behalf of the general public. Some such cases were viewed as frivolous "shakedown" lawsuits through which plaintiffs attorneys could extract substantial fees even if no person - including their client - was actually injured. Proposition 64 put a stop to many of these suits by requiring that individual plaintiffs have suffered an actual injury to have standing.

California state courts have not fully resolved how this "injury in fact" standing requirement applies to class actions. The California Supreme Court has ruled that class representatives, though not absent class members themselves, must demonstrate injury in fact to meet standing requirements. However, intermediate state appellate courts are split on whether this means that UCL classes containing uninjured absent members may be certified.

Federal court precedent on point has not completely clarified these matters. Though district courts are encountering UCL class actions with increasing frequency, they have often left these issues unaddressed. The limited amount of post-CAFA state precedent has meant that federal courts are left without much guidance on point, and some federal courts have even certified classes without addressing the distinction between standing and certifiability under the UCL.

California state precedent will likely have limited impact in federal courts, which are required to apply Article III standing requirements to all class members and will analyze class certification under Rule 23. The Ninth Circuit has not spoken definitively on these issues post-Proposition 64, but earlier this year the Eighth Circuit upheld a district court's denial of certification of a UCL class containing uninjured members (Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023 (2010)), and in 2009 a Central District of California court noted that class definitions should be tailored to exclude putative class members who lack Article III standing (Burdick v. Union Sec. Ins. Co., 2009 LEXIS 121768).

Additionally, a number of earlier Ninth Circuit and California district court cases support the general proposition that a class containing uninjured members is not certifiable, as each class member must be eligible under Article III to bring a claim in her own right. This is consistent with precedent barring individual federal UCL suits, even if viable in state court, where the plaintiff had not suffered "injury in fact" and could not demonstrate Article III standing.

Importance of Rule 23

The U.S. Supreme Court's recent decision in Shady Grove Orthopedic Associates v. Allstate Insurance, further underscores the increasing importance of federal procedural law in class action disputes - even where it impacts an arguably substantive state law. The Shady Grove court rejected federal court application of a New York state rule that prevented plaintiffs from bringing certain claims as class actions claims - making a federal class action possible where a state case was barred by a clear statutory directive. Logically extended, Shady Grove would require federal district courts to look solely to Rule 23 and applicable federal precedent rather than California law that might authorize certification of a class containing uninjured members. It should therefore bar the certification of UCL classes that - if they include plaintiffs who have not suffered injury in fact - would not meet federal Rule 23 requirements, even if California courts ultimately permit those classes to be certified.

Summary Judgment and Certification of CLRA Actions

California law prohibits motions for summary judgment in Consumer Legal Remedies Act (Civ. Code §§1750-84) actions - though claims can be dismissed before trial on a motion for determination that they are "without merit" (commonly termed a "no merits" motion). The standards are generally similar to those for summary judgment. However, this bar will not apply in federal court, where both sides can seek summary judgment - even on their CLRA claims - after removal.

Similarly, California courts are required to certify CLRA claims that meet a limited set of criteria (akin to a combination of Federal Rule 23(a) and 23(b)(3)'s predominance requirement). In federal court, where Rule 23 will control, a "rigorous" inquiry into each of Rule 23's requirements is required.

California's substantive consumer protection laws are becoming increasingly federalized as the trends in filing and removal to federal court continue. Practitioners should be mindful of the differing standards and the potential for federal procedural law to have significant substantive effect.

Reprinted with permission from the November 8, 2010 issue of The Recorder. Copyright 2010 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.