Thursday, February 09, 2012

Nationwide class action can't proceed under California law

Mazza v. American Honda Motor Co., Inc., --- F.3d ----, 2012 WL 89176 (9th Cir.) 
A little late, but this case will be much cited (see forthcoming post), so I'm doing it anyway. Over a strong dissent by Judge Nelson, the court of appeals reversed a certification of a nationwide class under California law, though still adhered to a bunch of 9th Circuit precedent on standing despite defendant Honda’s arguments. 
The district court certified a class of all consumers who purchased or leased Acura RLs equipped with a Collision Mitigation Braking System (“CMBS”) during a 3 year period, based on claims that certain advertisements misrepresented the characteristics of the CMBS and omitted material information on its limitations.  The CMBS was part of an optional technology package costing $4000 (it also included adaptive cruise control and run-flat tires).  Honda advertised that it detected the proximity of other vehicles; assessed speed; and implemented a warning, braking, and seatbelt-tightening process to minimize damage from rear-end collisions. 
The claims about the CMBS were made in product brochures available at dealerships, in TV ads, and in magazine ads.  Two intranet commercials stating that the system had limitations were viewable at kiosks at Acura dealerships, and Honda encouraged dealers to show them to potential customers, though the extent of use was unclear.  It also put video clips up on its websites directed at (but not limited to) owners.  And it Acura Style—a magazine sent to dealerships, subscribing owners, and “interested consumers”—reported on CMBS in an article.  In addition, the owner’s manual explained that CMBS might shut off in certain conditions, including bad weather, with a 5-second alert displaying on the instrument panel. 
Plaintiffs alleged that Honda didn’t warn consumers that (1) the stages of the advertised 3-stage collision avoidance system might overlap, (2) the system might not warn drivers in time, and (3) the system shuts off in bad weather.  After several rounds of briefing, the district court granted certification on the usual California statutes.  Class members purchased or leased their cars in 44 different states, though 12 states account for 76% of class members, with California at 20%, Florida at 10%, and New York, Virginia, New Jersey, Texas, Pennsylvania, Washington, Illinois, Maryland, Massachusetts, and Ohio at 3–6% each. 
The district court found several common questions of law and fact:
(1) whether Honda had a duty to Plaintiffs and the prospective class members to disclose that: the three stages of the CMBS System overlap; the CMBS will not warn drivers in time to avoid an accident; and that the CMBS shuts off in bad weather;
(2) whether Honda had exclusive knowledge of material facts regarding the CMBS System, facts not known to the Plaintiffs and the prospective class members before they purchased the RL equipped with the CMBS System;
(3) whether a reasonable consumer would find the omitted facts material; and
(4) whether Honda's omissions were likely to deceive the public. 
The district court also found predominance and that California “as the forum state, has enough significant contact or aggregation of contacts to the claims asserted, given Defendants' contacts with the state, to ensure that the choice of California law is not arbitrary or unfair to nonresident class members.”  California law could be applied to all class members because Honda didn’t show how state-law differences were material or how other states had interests in applying their laws in this case.  Under California law, class members were entitled to an inference of reliance on a material misrepresentation. 
The burden is on the party seeking certification.  On appeal, Honda challenged commonality, relying on Dukes.  Commonality requires a common contention, such that determination of its truth or falsity will resolve an issue central to the validity of each claim.  Honda argued that the “crucial question” of “which buyers saw or heard which advertisements” was not susceptible to common resolution, and that a showing of a “greater propensity to purchase” is “the same type of abstract question of potential peripheral significance that the Court in Dukes held was not common” under Rule 23(a)(2). 
The problem with Honda’s argument was that commonality only requires a single significant question of law or fact.  Even accepting Honda’s “crucial question” idea, those individual issues went to preponderance under Rule 23(b)(3), not commonality. 
On to Rule 23(b)(2), superiority and predominance.  Honda first challenged the uniform application of California law to class members in 44 jurisdictions.  Under California choice of law rules, the class action proponent must first show that California has “significant contact or significant aggregation of contacts” to the claims of each class member. At that point, the burden shifts to the other side to demonstrate “that foreign law, rather than California law, should apply to class claims.”  California law may only be used if “the interests of other states are not found to outweigh California's interest in having its law applied.”  In turn, this question is resolved by asking whether the laws of the jurisdictions are different and what interests they have in having their own laws apply.  If there’s a true conflict, the states’ interests must be weighed to figure out which one’s would be more impaired if its policy were subordinated to the policy of the other state. 
California had a constitutionally sufficient aggregation of contacts to the claims of each putative class member in this case because Honda's corporate headquarters, the advertising agency that produced the allegedly fraudulent misrepresentations, and one fifth of the proposed class members were located in California. However, the district court abused its discretion in certifying a class under California law that contained class members who purchased or leased their car in different jurisdictions with materially different consumer protection laws. 
Honda “exhaustively detailed the ways in which California law differs from the laws of the 43 other jurisdictions in which class members reside.” The district court found that Honda had not met its burden of demonstrating that any of these differences were material, but the majority disagreed.  Some states require scienter, unlike California.  California named class plaintiffs have to show reliance, while other states’ statutes don’t require that.  These were not “trivial or wholly immaterial differences.”  Moreover, there were material differences in remedies, which might depend on wilfulness.  Unjust enrichment claims also varied from state to state. 
Given these differences, the next question was whether the other states’ interests outweighed California’s.  Each state is allowed to make its own judgments about prohibiting conduct within its borders, and has an interest in having its law applied to resident claimants.  Thus, the 44 states at issue here had a strong interest in applying their own consumer protection laws to these transactions.  “In our federal system, states may permissibly differ on the extent to which they will tolerate a degree of lessened protection for consumers to create a more favorable business climate for the companies that the state seeks to attract to do business in the state.”  
Note that there is an empirical claim embedded in this statement: that making things better for consumers makes things worse for businesses.  As George Akerlof famously demonstrated, there are at least some circumstances where this is false: consumers who have no reason to believe sellers’ promises have little reason to buy—as, perhaps, potential customers in the market for private-label mortgage-backed securities might be the most recent to testify.  Indeed, all the states adopted consumer protection laws in part with the rationale that doing so served to enhance the fortunes of those businesses that treated consumers well, so while one may argue that it is legislatures and not courts that ought to make this call, state legislatures in fact have made this call.  Thus, the strong form of this empirical claim is hard to accept even as a conflict of laws principle. 
Still, the majority held that the district court erred by “discounting or not recognizing each state's valid interest in shielding out-of-state businesses from what the state may consider to be excessive litigation…. Maximizing consumer and business welfare, and achieving the correct balance for society, does not inexorably favor greater consumer protection; instead, setting a baseline of corporate liability for consumer harm requires balancing the competing interests.”  The balance “between protecting consumers and attracting foreign businesses, with resulting increase in commerce and jobs,” is a policy decision for legislatures and courts within each state.  “More expansive consumer protection measures may mean more or greater commercial liability, which in turn may result in higher prices for consumers or a decrease in product availability.”  Each state should be able to make that call on its own, and has an interest in applying its own limits on liability. 
California conflict of laws doctrine isn’t supposed to identify the “best” social policy.  Thus, the district court didn’t give adequate weight to foreign states’ interests in applying their laws to transactions within their borders, and the impairment to those interests caused by application of California law to those transactions.  The district court wrongly elevated state interests in consumer protection, “while ignoring or giving too little attention to each state's interest in promoting business.”  CAFA was supposed to stop that. Also, California generally considers the place of the wrong (where the last act necessary to make the actor liable occurred, here the communication of the ads to the customers) as having the predominant interest.  California’s interest in regulating such transactions is attenuated, even though Honda is a California corporation.  Under the circumstances, each state’s consumer protection laws should apply to transactions within that state’s borders.
Thus, the certification order was vacated; the majority expressed no view on whether certification of a California-only class or state by state subclasses would be appropriate, in the latter case with different jury instruction for materially different bodies of state law. 
Honda also argued that there was no predominance of individual issues because individualized determinations of whether class members were exposed to misleading ads and whether they relied on the ads would be required.  It contended that presuming common exposure and reliance violated Article III’s standing requirements because nonexposed/nonrelying class members didn’t suffer an injury in fact. 
The court found for Honda on the predominance argument but against it on standing.  The UCL allows relief to absent class members without individualized proof of deception, reliance, or injury; Honda concluded that therefore the class included individuals who have no injury in fact.  However, to the extent that class members paid more for the CMBS than they otherwise would have paid, or bought it when they otherwise wouldn’t have, because of Honda’s deceptive claims, they suffered injury in fact.  In light of existing precedent, the fact that state law gives a right to relief without more particularized proof of injury and causation was not enough to preclude standing. 
However, the majority agreed that the misrepresentations here didn’t justify a presumption of reliance, “primarily because it is likely that many class members were never exposed to the allegedly misleading advertisements, insofar as advertising of the challenged system was very limited.”  While an inference of reliance has been made in other cases where the advertising at issue was broadly disseminated, there was no extensive and long-term fraudulent campaign here.  (The majority seems to give weight both to the extent of the campaign and to the fact that Honda’s misconduct allegedly came from omitting the limitations of its systems rather than from outright fraud.)  The limited scope of the ads at issue made it unreasonable to assume that all class members viewed them.  In the absence of a “massive” ad campaign, the relevant class has to be defined in such a way as to include only members who were exposed to the ads, and also to exclude members who learned the truth before they bought.  Thus, certification was also vacated because “common questions of fact do not predominate where an individualized case must be made for each member showing reliance.” 
The majority, in a footnote, differed with the dissent over “the importance of the individualized questions of law or fact over which any common questions must predominate.”  The majority concluded that the dissent gave inadequate weight to the limited dissemination of the Honda ads at issue, making reliance harder to presume.  On choice of law, the dissent gave inadequate weight to differences in consumer protection laws. 
Judge Nelson dissented.  The CLRA and UCL allowed a presumption of reliance, and the focus of the inquiry shouldn’t be on which class members saw the ads and relied on them.  They were broadly disseminated, and they omitted potentially material information.  Plaintiffs alleged that everyone in the class was exposed, even if other information was potentially available, and they also alleged that the named plaintiffs and class members wouldn’t have paid for the CMBS system with adequate disclosure. This was enough to impute reliance to the class. 
The dissent concurred that Honda’s contacts with California were sufficient to satisfy the Constitution.  Honda’s principal place of business and corporate HQ are in California, and so are the ad agencies that created ads for the CMBS system and internet-based ads. 
On choice of law, the dissent found only one potentially material difference in state laws: Louisiana, Georgia, Mississippi, Kentucky, Virginia and Alabama prohibit class actions that allege unfair trade practices under state law.  The dissent then considered whether those states had interests in applying their laws to this litigation.  “[P]ro-business legislation does not speak to the specific interest states have in imposing their laws on this litigation. Honda has not shown how a state's general interest in prohibiting class actions brought under its own consumer protection laws translates into an interest in having its laws apply to this litigation. Unmistakably, California has a keen interest in deterring California corporations, with their principal places of business in California, from engaging in tortious conduct within the state.” 
California suffered more from not having its law applied to this case: “Honda is incorporated and headquartered in California; the advertisements at issue emanated from the state. California has a compelling interest in regulating the conduct of corporations operating within the state and availing themselves of the state's privileges.” 
The dissent predicted significant negative consequences for consumers, because individual actions are so unlikely.  “Without certification of a nationwide class to which California law applies, Honda becomes free to avail itself of the benefits offered by California without having to answer to allegations by consumers nationwide that it has violated the consumer protection laws of its forum state. This situation will allow corporations to take advantage of a forum state's hospitable business climate on the one hand, while simultaneously discounting the potential for litigation by nationwide consumers in response to a particular profit-motivated but harmful action on the other.”

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