Monday, November 10, 2014

Prior class settlement precludes state from seeking restitution for false advertising

California v. IntelliGender, LLC, -- F.3d ---, No. 13–56806, 2014 WL 5786718 (9th Cir. Nov. 7, 2014)

The 9th Circuit held that a CAFA-compliant settlement precluded the People of the State of California, acting through their representatives (here San Diego’s City Attorney), from seeking restitution for IntelliGender’s allegedly false advertising, but did not preclude other remedies. The district court approved a settlement for a nationwide class of buyers of the IntelliGender Prediction Test, touted as an accurate predictor of a fetus’s gender using the mother’s urine sample.  The State sought civil penalties, injunctive relief, and restitution, and IntelliGender sought to enjoin its action.  Because the State’s action was “designed to vindicate broader governmental interests than the class action,” the whole thing couldn’t be enjoined.  But because CAFA provides that the defendant has to provide notice to relevant state officials of any settlement, to allow them to object, and California didn’t, it couldn’t now obtain a duplicate recovery in the form of restitution of citizens who were bound by the bargained-for restitution in the settlement. [This result puts a premium on the FTC monitoring settlements, which is arguably a good thing but may strain resources; since so much of the FTC’s recovery in recent years has been restitution-based, the ability to cut that off at a comparatively low price could be incredibly valuable.] 

CAFA  requires notice of a proposed settlement to be served on the “appropriate” federal and state officials—typically the USAG and “the person in the State who has the primary regulatory or supervisory responsibility with respect to the defendant.” A court can’t order final approval of a proposed settlement until 90 days after the notification.  The state isn’t required to intervene, and it might not: “Aside from securing compensation for citizens, state enforcement actions serve other interests such as protecting citizens from future harm, and these interests might not be served by intervention in ongoing settlement proceedings.”  Being an objector could serve important interests, but direct enforcement actions serve equally if not more important public interests; CAFA doesn’t interfere with government’s power to bring enforcement actions.  Under California’s UCL, a public prosecutor can seek civil penalties, permanent injunctive relief, and restitution, but private individuals are limited to injunctive relief and restitution. Private suits can’t substitute for public enforcement actions, “which serve as a far greater deterrent and thus a greater protection.”

IntelliGender makes the IntelliGender Prediction Test that promises “immediate gender results in the privacy and comfort of the home. In minutes, the IntelliGender Gender Prediction Test indicates your gender result based upon an easy to read color match.”  IntelliGender settled a class action over its advertising, with proper notice to state and federal officials, by agreeing to pay $10.00 for each approved claim and to make a cy pres donation of $40,000 worth of product. In addition, it agreed to change its website’s advertising as well as the Test’s product insert and box. Changes to the product website included clarifying that the “Nobel Prize winning chemist [who] was added to the research team,” was actually “a graduate student” who was merely “part of a 1996 Nobel Prize winning research team in chemistry.” To receive the $10.00, a class member had to submit a valid claim form, requiring her to swear under penalty of perjury that the Test result was inaccurate as to her child’s gender.  [Note: this settlement indicates the compromise involved in settlement, perhaps too much here; those changes are tiny, and requiring inaccuracy as to the child’s gender seems misguided when flipping a coin would have been right roughly 50% of the time, thus undercompensating class members who were fooled but got lucky.]

Subsequently, the San Diego City Attorney sued for violations of the UCL and FAL (also alleged in the class action).  IntelliGender removed and the case was transferred to the judge who presided over the related class action.  IntelliGender sought an injunction under the All Writs Act and under principles of res judicata, but the district court refused, reasoning, in part, that the State’s claim was brought in the State’s sovereign capacity to protect its citizenry from unscrupulous business practices.

Federal courts can’t enjoin state court actions except under a few circumstances, including where necessary “to protect or effectuate the federal court’s judgments,” which reinforces res judicata and collateral estoppel. “Res judicata applies when the earlier suit: (1) reached a final judgment on the merits; (2) involved the same cause of action or claim; and (3) involved identical parties or privies.”  (The court of appeals noted that, because the issue was not argued, the court was using federal law without resolving whether the federal or state law of res judicata should apply.)

There was definitely a final judgment on the merits on the same causes of action, the UCL and FAL.  Privity was the key, and the Supreme Court has cautioned that “issuing an injunction under the relitigation exception is resorting to heavy artillery. For that reason, every benefit of the doubt goes toward the state court; an injunction can issue only if preclusion is clear beyond peradventure.”

The court found that the district court correctly denied IntelliGender’s motion to enjoin the State’s enforcement action in its entirety.  No class action settlement could bind the State in its sovereign capacity, where it asserted both public and private interests.  The fact that special penalties were available to the State showed the separate public interest.  The State’s failure to object to the settlement was irrelevant; an official objection or its absence is relevant to fairness, but CAFA specifically provides that the notification requirement does not “impose any obligations, duties, or responsibilities upon, Federal or State officials.”  To count failure to object as a reason to find res judicata would undermine the purpose of the statute.

But what about the State’s claims for restitution?  Insofar as it sought restitution for individual members of the settlement class, the action should have been enjoined under the court’s continuing jurisdiction to enforce and administer the settlement.  Courts should preclude double recovery by an individual, and when the government sues for the same relief a plaintiff has already pursued then the requisite closeness of interests for privity is present.  The individuals on whose behalf the State sought restitution were the same as the certified class, and it didn’t matter that the amounts sought were different.  The district court had reasoned that the class was limited to only those who bought the product and got an inaccurate result, whereas the State was seeking restitution for all purchasers—but that wasn’t true. It was just that only members who got an inaccurate result (and applied) got paid.  Members who didn’t get compensation are still bound by the settlement; if the State wanted compensation for them, it should have intervened after receiving notice.  “This is the method CAFA established for states to seek equitable compensation for class members.”  Compensation was res judicata.  The different amount sought didn’t matter, and just confirmed that the State was seeking double “(or at least better)” recovery.  “[T]he appropriate inquiry is not what relief was ultimately granted, but whether the government is suing for the same relief already pursued by the plaintiff.”  The district court abused its discretion in not granting an injunction, given the harms of relitigation to the class action system.  Allowing extra claims for restitution would decrease the incentive to settle and buy peace.

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