Ninth Circuit Refuses To Enforce Release in State Court Class Action Settlement

Sun, 14 Mar 2010 21:38:09 GMT

Last week the Ninth Circuit issued an opinion that highlights the fact that no matter how broadly you draft the release in a class action settlement, you can't necessarily count on a subsequent court enforcing it.

In Hesse v. Sprint Corp., No. 08-35235, Slip op. (9th Cir. Mar. 2010), plaintiffs brought a class action against Sprint, alleging that it improperly charged Washington State's business and operations tax as a line item to its customers when the law disallows such a pass-through and instead requires it to be part of the company's "operating overhead." Plaintiffs assert causes of action under Washington's Consumer Protection Act, breach of contract, and unjust enrichment.

Sprint moved for summary judgment in the trial court, holding that the action was barred by the release and judgment in a nationwide class action settlement entered by a Kansas state court (the "Benney Settlement") in 2006. The Benney Settlement involved a class of Sprint customers who were charged various federal regulatory fees between 2000 and 2006. The class in the Benney Settlement released:

any and all claims . . . that have been, could have been, or in the future might be asserted in the [Benney] Action[] or in any other court or proceeding which relate in any way to the allegations that . . . Sprint failed to properly disclose or otherwise improperly charged for surcharges, regulatory fees, or excise taxes, including but not limited to the [federal] Regulatory Fees; and all other causes of action . . . whether based on federal, state, or local statute . . . that have been, could have been, may be, or could be alleged or asserted by any Class member . . . against [Sprint] relating to . . . the subject matter of any of the claims alleged in the Benney Action.

Slip op. at 3852.

The plaintiffs in Hesse admittedly were members of the Benney class. The question, then, was whether the release in the Benney Settlement precluded plaintiffs' claims premised on Sprint's charging of a state-law tax (Washington's B&O tax) when the underlying claim in the Benney action had been the charging of federal regulatory taxes.

The Ninth Circuit held that "the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement." Id. at 3854.

The Ninth Circuit cited Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) to conclude that although the subsequent class could not mount an all-out collateral attack on the prior state court judgment, it could seek limited review of whether the procedures in the prior litigation afforded them due process. Slip op. at 3855. The Ninth Circuit found that the Kansas court had not made an explicit finding that the class representative in the Benney Settlement adequately represented class members who also had claims based on state taxes. Accordingly, the Ninth Circuit undertook its own analysis of the adequacy of representation in the Benney Settlement.

The Ninth Circuit held that because the named plaintiff in the Benney Settlement -- who, like me, hails from Missouri -- did not have claims based on Washington's B&O tax, he did not adequately represent the plaintiffs in the Hesse class. This was not only because he did not "vigorously prosecute the claims relevant to this case," but also because he "had an insurmountable conflict of interest with those members of the class." Id. at 3857-58.

The Ninth Circuit took care to indicate that it was not invalidating the Benney Settlement -- at least as to the release of all claims pertaining to the federal regulatory fees at issue in Benney. Instead, it held "only that any release of the B&O Tax Surcharge claims at issue in this case by the judgment approving the Benney Settlement would violate due process." Id. at n.5.

So are class action settlements only able to release the claims that the plaintiffs brought in the case? The Ninth Circuit said no, a release may be broader than the claims stated, but only to a point:

A settlement agreement may preclude a party from bringing a related claim in the future "even though the claim was not presented and might not have been presentable in the class action," but only where the released claim is "based on the identical factual predicate as that underlying the claims in the settled class action."

Id. at 3860 (quoting Williams v. Boeing Co., 517 F.3d 1120 (9th Cir. 2008)). The Ninth Circuit concluded that because "the Washington Plaintiffs' claims do not share an identical factual predicate with the claims resolved in the Benney Settlement," they were not derived from the same transaction or occurrence and thus could not be precuded by the Benney Settlement.

The Hesse opinion is an important read for all counsel who draft class action settlements.

Waiting On The Supreme Court

the10bdaily@hotmail.com (Lyle Roberts) — Sat, 13 Mar 2010 02:42:54 GMT

(1) The "group pleading" doctrine allows plaintiffs to rely on a presumption that statements in corporate documents are the collective work of individuals with direct involvement in the everyday business of the company. In its Tellabs decision, the U.S. Supreme...

Layaway Making a Comeback? Retailers Beware

Fri, 12 Mar 2010 21:14:44 GMT

With so much of the economy still struggling, credit harder to come by, and consumers being more conservative with their spending, various commentators have suggested that layaway programs are poised to make a comeback. However, retailers should be careful before implementing layaway programs, especially if they are doing so on a national basis.

Several states have statutes specifically regulating layaway transactions, setting forth the maximum service charges, the refund policies, and other terms required by law. In some cases, the penalties for noncompliance can be severe, including statutory penalties or multiples of actual damages. Maryland, Ohio, Rhode Island, and the District of Columbia, among others, have statutes which specify terms that must be included in all layaway transactions, and in some cases those terms may be such that it is no longer profitable for the retailer to offer layaways. In particular, retailers may be seriously restricted in their ability to charge service fees or impose penalties for noncompliance with the terms of the agreement. As a result, some retailers are specifically excluding certain jurisdictions, or providing for alternative contractual terms in those jurisdictions. For example, the layaway program for Toys ‘R Us and Babies ‘R Us stores is apparently not available in Maryland and is subject to different terms in Ohio and Rhode Island.

Layaway may very well prove to be a reliable business model for bringing consumers into stores (or onto websites) but its also an area where a patchwork of local laws can create dangerous legal minefields.

Class Action Motion Rejected in Human Tissue MDL

Fri, 12 Mar 2010 14:48:15 GMT

We have posted before about the interesting Human Tissue litigation. The multidistrict litigation consolidated hundreds of cases filed either by plaintiffs who received allografts — transplants from cadavers — harvested by defendants allegedly without obtaining proper consent and following appropriate regulations, or by those plaintiffs who allegedly had allografts improperly taken from deceased relatives. The MDL court last week denied the latter plaintiffs' motion for class certification. In re: Human Tissue Products Liability Litigation, No. 06-135/MDL 1763 (D.N.J.).

According to the named representative plaintiffs, each of the class members had a deceased family member whose body went to one of the defendant funeral homes; plaintiffs claim that the funeral homes, after taking possession of the bodies, allowed another defendant to extract bones and tissue from the decedents. Following this, the harvested tissue then allegedly was given to other defendants, tissue banks. The purported class consisted of “all next of kin relatives of decedents whose bodies were desecrated by [defendants] for the harvesting and sale of human body parts."

Two parts of the opinion will be of the most interest to readers. First, under the Rule 23(a) prerequisites, the court found that the typicality element was not established because of the highly individualized nature of the claims in this action. Plaintiffs asserted emotional distress claims against the funeral homes that handled the donor decedents' remains and the tissue processors who allegedly received the harvested tissue. The Third Circuit has stated that class certification is inappropriate in mass tort claims, generally, because they often present questions of individualized issues of liability. In re Life USA Holding Inc., 242 F.3d 136, 145 (3d Cir. 2001). This observation is particularly true where the tort claims alleged are premised on emotional distress. The factual circumstances underlying each of the individual claims – including but not limited to plaintiffs' relationships with the decedents and the injuries allegedly suffered – were sufficiently personal and specific as to prevent any finding of similarity with regard to their claims.

Also, plaintiffs were bringing contractual claims against the funeral home defendants, which again hinged on different factual circumstances that also might give rise to different defenses. There was no allegation that the individual contracts made with the funeral homes concerning final arrangements for the donor decedents were identical; in fact, since they were drafted and negotiated by different funeral home representatives and family members, they likely contained different representations, again subject to different defenses. For example, the meetings between funeral home personnel and the decedents' family members involved representations regarding the specific services requested and potential tissue donation. "These are all very personalized discussions," said the court. All in all, the court found sufficient factual differences among the contracts negotiated with the different funeral homes to preclude a finding of typicality. See In re Schering Plough Corp. ERISA Litig., 589 F.3d 585, 598 (3d Cir. 2009)(“Ensuring that absent class members will be fairly protected required the claims and defenses of the representative to be sufficiently similar not just in terms of their legal form, but also in terms of their factual basis and support.”); see also In re Life USA Holding, Inc., 242 F.3d at 144-46 (vacating class certification in part because plaintiffs' claims of deceptive insurance sales practices arose from individual and non-standardized presentations by numerous independent agents).

It is significant that the court put some teeth into the 23(a) element. While the court acknowledged that factual differences will not automatically render a claim atypical if the claim arises from the same event or practice or course of conduct that gives rise to the claims of the class members, and if it is based on the same legal theory, here plaintiffs failed to demonstrate, other than through a bald assertion, that any practice or course of conduct existed among the funeral homes or among the tissue processors.

The same differences undermined a showing of predominance and superiority under Rule 23(b)(3), which provides for certification when the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

The individual factual circumstances, including contractual arrangements, personal relationships with the decedents, injuries suffered, etc. precluded a 23(b)(3) class. The superiority inquiry compels a court to balance, in terms of fairness and efficiency, the merits of a class action device against those of alternative available methods of adjudication. Here, the multitude of individualized issues presented in plaintiffs' claims would entail complicated mini-trials within the class action itself. The claims presented by plaintiffs and their unique factual underpinnings would require such extensive individual consideration that it would be neither more fair nor more efficient to proceed with this matter as a class action. Class rejected.

Federal Court Holds State Product Liability Act Trumps other Causes of Action, Including the State's Consumer Fraud Act

Fri, 12 Mar 2010 09:00:00 GMT

We defense lawyers have grown so accustomed to plaintiffs trying to repackage a products liability claim as one for consumer fraud that we sometimes forget to check a state's products liability statute for potential defenses when the complaint fails to mention it and instead cites the state's consumer fraud act. But by failing to look at the product liability statute, we may be passing up an important defense, as was demonstrated in Mitchell v. Proctor & Gamble, 2010 WL 728222 (S.D. Ohio Mar. 1, 2010).

The plaintiff in Mitchell brought a putative class action against the maker of an over-the-counter heartburn medicine, Prilosec OTC. The plaintiff, who said he was the only one who became ill after a buffet-style dinner party, claimed that taking Prilosec OTC predisposed consumers to contracting food-borne illnesses. His class was defined as all consumers of Prilosec OTC from 2004 to the present. He asserted causes of action for strict liability failure to warn, negligent failure to warn, violations of Ohio's Consumer Sales Practices Act, breach of express warranty, and breach of implied warranty.

The court first analyzed the defendants' argument that the entire action was preempted by Ohio's Products Liability Act. The OPLA defined a "products liability claim" as a civil claim seeking recovery for compensatory damages from a manufacturer for death, personal injury, emotional distress, or property damage arising from the product's design, any warning or instruction, or the product's failure to conform to a warranty. Id. at *2-*3. The OPLA had eliminated all common-law product liability causes of action.

The plaintiff sought recovery for "treatments for food-borne illnesses," "the purchase price of the product," and the difference between the market value of the product and its actual value. But the court held that "[plaintiff] cannot separate out his claims from the purview of the OPLA simply by claiming only economic losses. His claims . . . are products liability claims. And the injury he is alleged to have suffered relates directly to that product." Id. at *4.

The court also noted that there was a long line of authority holding that where a plaintiff used the consumer fraud statute (the OCSPA) to assert claims that were primarily rooted in products liability claims, the OPLA preempted those claims, too. Id. Accordingly, the court dismissed all of plaintiff's claims without prejudice for him to plead a proper claim under the OPLA, which he had not previously cited. Thus, an unpled product liability statute proved to be the Defendant's best weapon to defeat a host of consumer fraud claims.

In dicta, the court also commented on the inadequacy of the factual pleadings under the Rule 8 standard of Twombly/Iqbal. Plaintiff alleged that he attended a dinner, that he had been taking Prilosec, and that he was the only one who became sick. That, the court held was not enough:

Nowhere in [plaintiff's] factual allegations does he connect his assertion that Prilosec OTC increase the risk of foodborne illness with the circumstances surrounding his illness. Thus, his Amended Complaint is full of "naked assertions" that are lacking "further factual enhancement." This Court cannot make inference upon inferences to provide the factual enhancement to [plaintiff's] claims.

Id. at *5 (citations omitted).

Ultimately, the court held that plaintiff should have another chance to plead an OPLA claim with sufficient factual particularity. But it was clear from Mitchell that both the common law and OCSPA claims were preempted -- proving once again that it pays to check statutes that are not cited in the complaint when making decisions about motions to dismiss and affirmative defenses.

FDA Looks to Boost Criminal Prosecutions

Thu, 11 Mar 2010 14:44:32 GMT

In the wake of a scathing March 4^th GAO Report, FDA has informed Congress that it will boost criminal prosecutions of pharmaceutical and food industry executives.[1] Although the Agency’s Office of Criminal Investigation (OCI) can prosecute ‘responsible corporate officials,’ according to the GAO Report OCI has failed to exercise this enforcement tool to achieve FDA priorities and has underperformed comparable agencies in bringing misdemeanor prosecutions.

The Report determined that OCI instead operates independent from broader FDA priorities and with little accountability to top FDA officials. As the authors noted, “FDA’s oversight of OCI’s investigations of individuals and companies external to FDA is limited.” In her letter to Senator Charles Grassley (R-Iowa), FDA Commissioner Margaret Hamburg acknowledged that OCI and FDA’s various centers must improve their communication. If they do not, OCI will continue to operate outside the context of emerging Agency policies and priorities, and OCI’s prosecution trends cannot inform FDA policies or support appropriate allocation resources for inspections, civil enforcement, and risk communication.

Industry insiders find the lack of OCI accountability and oversight especially troubling during FDA’s public campaign for increased transparency. Meanwhile, FDA has allowed OCI to lag comparable federal agencies in developing performance standards; indeed, the GAO reports that OCI has failed to complete 70% of required assessments. Although Hamburg promises greater communication between OCI and high-level FDA administrators, there is no small gap to bridge.

Although the Report focused principally on improved communication, accountability, and oversight, what caught the press’s attention is the prospect of increased misdemeanor prosecutions. No surprise. The American public has not forgotten last year’s rash of adulterated imports, and the public has a keen interest in FDA-regulated products.

Prudently, however, FDA does not expect to see widespread and aggressive criminal prosecutions in all areas. Instead, stepped up criminal enforcement will likely more specifically target issues concerning counterfeiting, diversion, tampering, and adulteration: key Agency priorities. Under the FDCA's strict-liability provisions, fraudulent information is fraud; misdemeanor prosecutions can proceed without proof of intent to defraud.

Commissioner Hamburg expects revised OCI policies and procedures to incorporate some newly developed criteria for selecting cases to prosecute.

Authored by:

Deborah M. Shelton
(202) 772-5351
dshelton@sheppardmullin.com

[1] GAO, “Food and Drug Administration: Improved Monitoring and Development of Performance Measures Needed to Strengthen Oversight of Criminal Misconduct Investigations,” 29 January 2010, released 4 March 2010. Available http://gao.gov/products/GAO-10-221

FDA Proposed Rule: Sponsors Must Report Suspicions of Falsified Study Data

Thu, 11 Mar 2010 14:39:14 GMT

A proposed FDA rule would require all “sponsors” (defined broadly) to report not only known falsification of study data but also falsifications merely suspected. The rule, “Reporting Information Regarding Falsification of Data,” defines falsification as “creating, altering, recording, or omitting data in such a way that the data does not represent what actually occurred.” The rule proposes strict timeframes for reporting. The duty to report would be undiminished even where evidence of falsification is slight.

Parties seeking to comment on the proposed rule must submit comments by May 20, 2010.

Broadly Defining “Sponsor”

The proposed rule would include petitioners submitting food additive, color additive, nutrient content claim, and health claim petitions; manufacturers or distributors submitting new dietary ingredient notifications; and sponsors as defined in §§ 58.3(f) (non-clinical laboratory studies), 312.3(b) (clinical investigations), 510.3(k) (animal drugs), and 812.3(n) (investigational device exemptions). The Agency says this broad definition of “sponsor” is needed to prevent ambiguities.

Falsfications by Whom, and When?

Sponsors would report a finding or suspicion that any person has engaged in falsification in reporting of study results. Similarly, reports would be required for falsification during the course of proposing, designing, performing, recording, supervising, or reviewing studies that involve human subjects or animal subjects. The rule would cover falsifications discovered or suspected before, during or after study completion, as well as after review, approval, or authorization of the affected product or labeling.

Suspected Falsification

The proposed rule would require sponsors to report suspected falsification. Sponsors need not make definitive determinations of falsification prior to reporting, but they cannot avoid making a report of suspicion merely for lack of evidence. The Agency has declined to set a specific evidentiary threshold. “Rather, a sponsor would be required to report information of which it is aware suggesting that a person has, or may have, engaged in the falsification of data in connection with studies conducted by, or on behalf of, the sponsor, or relied on by the sponsor. This reporting obligation would exist regardless of the amount of evidence….” 33 Fed.Reg. 7415 (Feb. 19, 2010).

Timeframe for Reporting

Sponsors must report no later than 45 days after becoming aware of the falsification. In the case of suspected falsification, it is unclear whether the 45-day period is delayed for purposes of further investigation or whether satisfactory further investigation would relieve a sponsor’s obligation.

Information Included in Such Reports

Reports must include the name of the person suspected or confirmed to have engaged in falsification, and his or her address and phone number. The sponsor must identify the potentially affected study and, if applicable, information about the drug or device application. In addition, the sponsor must provide the information that led to the suspicion. FDA is considering whether reports should include additional information, such as the National Clinical Trail (NCT) number.

Reports can be made to the appropriate FDA center via telephone, facsimile, mail, or electronic mail. FDA will determine whether to investigate further.

Penalties

The Agency has not yet determined appropriate penalties. Under consideration: Making failure-to-report a violation of section 301(e) of the Federal Food, Drug, and Cosmetic Act (i.e., failure to make a required report); or a violation of 18 U.S.C. 1001, submission of a false statement to the government.

Reminder: comments must be submitted by May 20, 2010.

Authored by:

Deborah M. Shelton
(202) 772-5351
dshelton@sheppardmullin.com

and

Arianna B. Chernove
(202) 772-5361
achernove@sheppardmullin.com

Summary Judgment for Drug Company in Pain Pump Case

Thu, 11 Mar 2010 11:44:23 GMT

A federal court has granted defendant summary judgment in a case which alleged that cartilage damage sustained by the plaintiff, a former high school athlete, was caused by the post-surgery use of the drug company’s pain medication in an automated pump device. Jensen Meharg, et al. v. I-Flow Corp., et al., No. 1:08-cv-00184 (S.D. Ind. 3/1/10).

The former high school athlete underwent shoulder surgery, after which a pain pump was utilized. The pain pump in question was manufactured and sold by I-Flow Corporation; the local anesthetic–bupivacaine Hcl – was manufactured and sold by defendant AstraZeneca. AstraZeneca did not in any way promote the use of bupivacaine with pain pumps, and that use was not mentioned in the instructions and warnings provided with the drug -- an off-label use. Several months later, plaintiff began to experience shoulder pain again. An MRI allegedly revealed that plaintiff had developed chondrolysis in her shoulder, which she alleged was caused by the post-surgery administration of the bupivacaine with the pain pump.

The strict liability claim was for alleged failure to warn; a warning defect claim requires that defendant had a duty to warn. Duty is generally a legal issue. In the context of a prescription drug manufacturer, the duty to warn does not arise until the manufacturer knows or should know of the risk. In cases that involve an off-label use of a prescription drug that is not promoted by the manufacturer, the requisite knowledge of the risk, at a minimum, includes that the manufacturer must know (or be charged with knowledge of) both that the off-label use is occurring and that the off-label use carries with it the risk of the harm at issue – in this case, damage to cartilage.

The court found as a matter of law that the information allegedly possessed by defendant was insufficient to trigger AstraZeneca’s duty to warn of the risk of cartilage damage from continuous infusion of bupivacaine into a patient’s joint. Simply put, the plaintiff failed to point to sufficient evidence that demonstrated that at the time of plaintiff’s surgery AstraZeneca knew of that risk or that it should have known of the risk because experts in the relevant field had such knowledge.

More interesting was plaintiff's other theory. Plaintiff's expert also opined that prior to plaintiff’s surgery the defendant supposedly knew that bupivacaine was being used in pain pumps, and that this knowledge triggered an alleged duty to “investigate the nature of that use, determine whether the drug was being promoted in accordance with approved indications, conduct or sponsor those studies necessary to ensure that the promoted use was safe, and to warn physicians that long-term risks to the joint had not been scientifically established but that the risks should be weighed seriously, given that the anticipated use was for elective post-operative pain therapy for which multiple alternatives existed.” The court noted that such a “duty” does not exist under relevant (Indiana) law. The duty to warn does not arise until the manufacturer knows or should know of the risk. The alleged far broader duty – a duty, in essence, to warn physicians that there might be a risk, although we don’t know yet because neither we or the scientific community at large has studied it yet -- doesn't exist.

Such a duty would cause physicians to be inundated with such pseudo-warnings and quasi-risk information distracting them from heeding real warnings of actual risk; and it would add very little to the fact that physicians already know, i.e., that if a use is omitted from a prescription drug’s label, that use has not been tested sufficiently to demonstrate to the FDA that it is safe and effective.

Torts Twits of the Month: NY Assembly Members Ortiz, Markey, and Perry

Wed, 10 Mar 2010 23:17:04 GMT

I'm instituting a new feature on the blog this month: "Torts Twit of the Month." Each month I'll name someone who has done something exceptionally ridiculous in the field of torts be our Twit of the Month. Who knows, if it catches on, perhaps we can vote for our favorite Torts Twit of the Year!

The idea came to me as I read about the legislation featured below. To be candid, I'm not at all sure that I'll be able to keep up a Torts Twit of the Month feature. Most folks who do things that I disagree with in the field of torts are motivated by a legitimate reason. I may not agree with it, but I wouldn't go so far as to call them a twit. Biased, maybe. Wrong even. But not a twit.

But every once in a while you come across some bozo who is just soooo far out there that he just cries out for recognition of some kind. Here are their stories.

Three members of the New York Assembly make up our first recipients of the Torts Twit of the Month honors. This great triumvirate sponsors legislation to ban New York restaurants from cooking with salt.

Yes, you read that right: BAN New York restaurants from COOKING with ANY salt WHATSOEVER!

This salty troika's bill would empower the Attorney General -- who surely has better things to do -- to go to court to enjoin restaurants that violate the salt ban "without requiring proof that any person has, in fact, been injured or damaged thereby." The bill also would allow civil penalties of up to $1,000 for each instance of a restaurant's use of salt in meal preparation.

Salt, of course, is the oldest known food additive. It enhances other tastes, so that sweets taste sweeter and bitters less bitter. Salt is used in everything from eggs to soups to baked goods. It even acts as a preservative in my favorite Easter ham.

Which is what makes it so darn ridiculous that our March Torts Twits want to ban it entirely from restaurants. These elected officials are no doubt motivated by a desire to improve public health by lowering our salt intake. They may even have compelling personal stories about family experiences with health issues caused by the overconsumption of salt.

But that does not excuse the sheer hubris of this trio of local politicos in deciding for the rest of New Yorkers that they shall never have salt in a restaurant meal again. That's no way to approach a public health problem. Education? Sure. Public information campaigns? You bet. Targeted interventions by medical professionals? Absolutely.

But for the arrogance to assume the power to tell New Yorkers what we can and can't eat in our increasingly expensive restaurants, these three Assembly members have jointly earned the title of Torts Twits of the Month:

Assemblyman Felix Ortiz

District 51 (Brooklyn)

Salt Ban Sponsor

Assemblywoman Margaret M. Markey

District 30 (Queens)

Salt Ban Co-Sponsor

Assemblyman N. Nick Perry

District 58 (Brooklyn)

Salt Ban Multi-Sponsor

Another Federal Court Denies Class Certification Where Class Is Overbroad

Wed, 10 Mar 2010 22:09:40 GMT

A recent tobacco decision out of the Northern District of Illinois highlights the importance of challenging the class definition in the defense of consumer fraud cases. in Cleary v. Philip Morris USA, Inc., 2010 WL 680957 (N.D. Ill. Feb. 22, 2010), plaintiffs had brought three different class actions against the tobacco industry. One was for illegal underage smoking, one was for nicotene addiction, and one was for allegedly deceptively marketing "low tar," "light," and "ultra light" cigarettes as safer than other cigarettes.

Because of summary judgments that previously had been granted, the first two classes failed for lack of a representative plaintiff. But the court considered the class certification motion for the "light" cigarettes case.

The class was defined expansively: "persons who purchased and consumed Marlboro Lights in Illinois 'from the time such cigarettes were placed into the stream of commerce until the date that the defendant publicly and adequately disclosed to consumers the true nature and effect of these cigarettes." Id. at *1.

The court found that the complaint met the numerosity and commonality requirements of Rule 23(a), but it failed to meet the typicality requirement for two reasons. First, the plaintiff did not explain how he intended to demonstrate that he suffered an injury from defendant's alleged fraud and how that was typical of the class members. Second -- and more important -- the court focused on the overbreadth of plaintiff's class definition.

As the court explained:

Class C is defined so broadly that it is likely to include persons who suffered no detriment at all due to Philip Morris's conduct. Some class members may have purchased Marlboro Lights for reasons wholly unrelated to its purportedly less-unhealthy qualities--for example, because they preferred the flavor of other brands. And other class members may have purchased Marlboro Lights despite being completely unaware of claimed differences between the adverse effects of "light" cigarettes and other, non-"light" brands. It is not entirely clear where Cleary fits in along this spectrum. Though it is true, as Cleary points out, that factual differences among the claims of class members do not necessarily defeat typicality, the likelihood that some significant proportion of class members experienced no injury at all does, at least in a case like this one in which proof of detriment is a necessary element of the claim.

Id. at *4 (citation omitted).

Whether the court treats it as part of the element of typicality, as the Cleary court did here, or whether it treats it as a fundamental problem with the class definition, "overbreadth" (i.e., including within the class people who were uninjured by the product) presents serious problems that go to the core of who is going to be bound by the verdict and how the proof is going to establish classwide truths. That is why courts increasingly are denying class certification to overbroad classes.

Government Watchdog Calls for Elimination of FINRA

Wed, 10 Mar 2010 20:50:14 GMT

On February 23, 2010, the Project On Government Oversight sent a letter to Congressional committee members charged with financial oversight urging them not to trust or rely on the Financial Industry Regulatory Authority (FINRA) to police the brokerage industry. See...

The Project On Government Oversight (POGO) describes itself as an independent nonprofit organization that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government. POGO is perhaps best known for exposing outrageously overpriced military spending on items such as a $7,600 coffee maker and a $436 hammer.

POGO’s letter points out that securities industry Self Regulatory Organizations, in general, and FINRA in particular, have an “incestuous” relationship with the brokerage industry which is fraught with conflicts of interest, that FINRA has failed to prevent all the major brokerage scandals back to the 1980s, that FINRA has failed to regulate member firms at the heart of the financial crisis (Lehman, Bear Stearns, Merrill Lynch), and that FINRA has failed to detect or act upon Ponzi Schemes such as Madoff and Stanford.

With its cozy relationship with its member firms, which finance FINRA, and its “abysmal” track record, Congress should not trust FINRA to protect the investing public, POGO says. “Effective, independent, and efficient government regulation is the only proper way to safely oversee our markets,” POGO added in the letter, echoing the position of the National Association of State Securities Administrators. And that would mean the end of FINRA.

Reverse Convertible Notes and Similar Non-Conventional Investments are Unsuitable for Many Investors

Wed, 10 Mar 2010 18:03:29 GMT

Sales of poorly understood, non-conventional investments tend to increase in low-yield environments like the present. Reverse convertible notes are an example of this dangerous trend, says Jeff Benjamin in his recent InvestmentNews article, “Reverse convertible notes warrant sales scrutiny.”...

Also known as "revertible notes" or "reverse exchangeable securities"—and sold under a variety of proprietary names that may or may not use the term "structured" to describe the product—reverse convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. While often described as debt instruments, they are far more complex than a traditional bond and involve elements of options trading. Reverse convertibles expose investors not only to risks associated with bonds but also to the additional risks of the unrelated assets, which are often stocks.

They work like this: In exchange for higher interest payments, the investor gives the issuer the right to repay principal in the form of a set amount of the underlying asset, rather than cash, if the price of the underlying asset dips below a predetermined price. The investor (whether he knows it or not) is betting that the value of the underlying asset will remain stable or go up, while the issuer is betting that the price will fall. If the value of the underlying asset stays even or rises, the investor receives a high coupon for the life of the investment and the return of his full principal in cash. But, if the value of the underlying asset drops below its “knock-in” level, the issuer can pay back the investor with the depreciated asset—which means the investor loses some or all of his principal (offset only partially by the monthly or quarterly interest payments).

According to the article, a higher coupon yield signals a greater likelihood of the linked asset dropping below its knock-in level. This is because the coupon payment, currently averaging around 12%, is based on the linked asset’s most recent option price volatility.

It’s no different than rolling the dice. Why would brokers put their clients in a casino game? Perhaps because sales of such securities generate commissions or 2% or more – a sure thing for the broker.

The Financial Industry Regulatory Authority (FINRA) recently issued its first enforcement action involving the sale of reverse convertibles, in which it reminded the brokerage industry of its suitability obligations. FINRA fined H&R Block Financial Advisors Inc. $200,000 for inadequate supervision of reverse convertible sales and also ordered the firm to pay $75,000 in restitution to a retired couple who had their portfolio 40% allocated to reverse convertibles, according to the article.
The representative was reportedly fined $10,000, ordered to disgorge $2,023 in commissions and suspended from working with any FINRA-associated firm for 15 days.

FINRA also published an alert to investors that reverse convertibles “often involve terms, features and risk that can be difficult for individual investors and investment professionals alike to evaluate.”

FINRA also said that firms selling structured products that have a prominent option component should consider restricting sales to clients who are eligible to trade options. Firms should only “consider” not selling these speculative products to conservative investors? What a polite, friendly regulator.

Reverse convertible notes are speculative, high-risk investments that are totally inappropriate and unsuitable for most income-oriented investors. Conservative investors who have suffered significant losses in such products may have compelling claims to recover those losses.

Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. For further information, please contact us.

Product Liability Seminar Offers Topical Mass Tort Session

Wed, 10 Mar 2010 17:16:13 GMT

We have posted before about the 2010 DRI Product Liability Conference in Las Vegas in April, as an event worth checking out.

Let me add that one of the attractive feature of the conference is that, in addition to the exceptional program put together for the main stage, there are many great Specialized Litigation Group (subcommittee) programs planned, including the highly-relevant-to-readers Mass Torts & Class Actions SLG.

At the Mass Torts & Class Actions SLG breakout session on Thursday, April 8th (likely to be more daring than Criss Angel, more talented than Terry Fator, more energetic than a Blue Man Group) includes:

Legislative and Regulatory Update: Impact of New Administration and New Statutes, Rollback on Preemption and Effort to Rollback Twombley
Jeffrey A. Holmstrand, McDermott & Bonenberger PLLC, Wheeling, West Virginia
Anthony Sammons, Dinsmore & Shohl LLP, Lexington, Kentucky

Emerging Class Action Issues: Impact of the ALI Project on Aggregation and Update on Problematic Causes of Action (Public Nuisance, Consumer Fraud Act and Medical Monitoring)
Richard A. Oetheimer, Goodwin Procter LLP, Boston, Massachusetts
John Parker Sweeney, Womble Carlyle Sandridge & Rice PLLC, Baltimore, Maryland

Emerging Mass Tort Issues: Examination of Daubert/ Frye Issues, Update on Green-Product Issues and Use of Risk Assessment Concepts
Robert C. James, TERRA Inc., Tallahassee, Florida
David C. Uitti, Dechert LLP, Princeton, New Jersey

Best Practices on Managing Mass Torts: Exploring the Virtual Law Firm, Cost Controls, Alternative Fee Arrangements and Early Case Dispositions
Moderator Kip T. Bollin, Thompson Hine LLP, Cleveland, Ohio

You can still register.

Consumer Class Certification Denied -- Again

Wed, 10 Mar 2010 11:46:38 GMT

An up and down class action proceeding involving Listerine has taken a new turn. Pfizer Inc. v. Superior Court of Los Angeles County, No.B188106 (Cal. App. 3/2/10).

Plaintiffs brought a proposed class action on behalf of California consumers who allegedly purchased Listerine on the claim that the mouthwash prevented plaque and gingivitis as effectively as dental floss, relying on the state's Unfair Competition Law (UCL) (Bus. & Prof. Code, § 17200 et seq.) and the False Advertising Law (FAL) (§ 17500 et seq.). The trial court certified a California class consisting of all individuals who purchased Listerine between June, 2004 and January, 2005. The appeals court initially ruled in 2006 that the trial court’s certification was overbroad, relying on Proposition 64 which amended standing requirements in such actions and requires proof that the proposed class suffered injury. Following the decertification order, however, the California Supreme Court ordered the appeals court to revisit the issue in light of its intervening decision in In re: Tobacco II, 46 Cal.4th 298 (2009).

Upon remand, the court of appeals vacated the prior opinion, received supplemental briefs from the
parties and amici curiae, and reconsidered. Upon reflection, the appeals court concluded that the circumstances of the case still did not warrant class certification.

The court noted that the causation requirement for purposes of establishing standing under the UCL, and in particular the meaning of the phrase "as a result of" in section 17204, holds that a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions. Those same principles, the state supreme court had said Tobacco II in an amazingly result-driven fashion, do not require the class representative to plead or prove with an "unrealistic degree of specificity" that the plaintiff relied on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign. But Tobacco II does not stand for the proposition that a consumer who was never exposed to an alleged false or misleading advertising or promotional campaign is entitled to restitution.

The certified class, consisting of all purchasers of Listerine in California, was overbroad because it presumed there was a class-wide injury. However, the record reflected that of 34 different Listerine mouthwash bottles on sale, 19 never included any label that made any statement comparing Listerine mouthwash to floss. Further, even as to those flavors and sizes of Listerine mouthwash bottles to which defendant did affix the labels which were at issue, not every bottle shipped between in the class period bore such a label. Also, although Pfizer allegedly ran four different television commercials with the “as effective as floss” campaign, the commercials did not run continuously and there is no evidence that a majority of Listerine consumers viewed any of those commercials. Thus, many, perhaps the majority of, class members who purchased Listerine during the pertinent period did so not because of any exposure to any allegedly deceptive conduct, but rather, because they were brand-loyal customers or for other reasons. As to such consumers, there is absolutely no likelihood they were deceived by the alleged false or misleading advertising or promotional campaign. Such persons cannot meet the standard of having money restored to them because it “may have been acquired by means of” the unfair practice.

Finally, plaintiff testified he did not make his purchase based on any of the four television commercials or other ads, and that he bought Listerine due to the bottle’s red label (which differed from the other labels), which he recalled said “as effective as floss.” Because the various commercials and labels contained different language, with some even expressly advising consumers to continue flossing, his testimony as to his reaction to the Listerine label is not probative of his, or absent class members’, reaction to different language contained in television commercials and other labels. Therefore, named plaintiff lacked standing to assert a UCL claim based on those television commercials or other labels.

Microsoft Wins Another CPA Claim in Washington

Tue, 09 Mar 2010 20:18:46 GMT

Right around Christmas I gave you a boxed set of decisions involving Apple as a defendant. Today I thought I would even the score a bit and report on a short decision by U.S. District Judge Marsha J. Pechman regarding claims against Microsoft.

In Alvarado v. Microsoft Corp., 2010 WL 715455 (W.D. Wash. Feb. 22, 2010), the plaintiff had brought a putative class action under Washington's Consumer Protection Act, as well as a common law claim of unjust enrichment and a request for declaratory judgment. Plaintiff complained that customers who buy new computers and only want to run Windows XP must first buy a computer with Vista or Windows 7 and then "downgrade" their computer to XP.

Plaintiff alleged that she bought a Lenovo laptop that included a license to use the Vista Business Operating System.

Judge Pechman analyzed the CPA claim first, holding that plaintiff failed to plead that she was a direct purchaser, thus running afoul of the CPA's direct purchaser requirement. Washington's intermediate appellate court had rendered a decision in a pharmacy case that patients who buy medicines from a pharmacy are indirect purchasers who do not have claims against the maufacturers. See Id. at *2 (citations omitted).

She also held that plaintiff failed to identify an unfair or deceptive act or practice. Unfairness, under Washington law, requires a legislative declaration that certain acts are per se unfair. There were no such declarations here. Second, there was nothing deceptive about Microsoft's conduct of selling new computers with the most advanced operating systems. Because the plaintiff had been given multiple opportunities to plead a CPA claim, the court dismissed this count with prejudice.

The court dismissed the unjust enrichment count without prejudice. The court rejected Microsoft's argument that an indirect purchaser cannot assert an unjust enrichment claim. Id. at *5. She did note, however, that plaintiff never pled that she had to pay for a downgrade; in fact, from the complaint it seemed that she received both XP and Vista for the price of one. Accordingly, there was no unjust enrichment. And since there was no unjust enrichment and no violation of the CPA, there could be no declaratory judgment.

Federal Court Rejects Coupon Settlement Under CAFA

Tue, 09 Mar 2010 19:54:32 GMT

A federal court in California recently sided with twenty-six state attorneys general and several objectors in rejecting a proposed class action settlement that called for Honda to provide over 175,000 Honda Civic Hybrid owners a coupon worth no more than $1,000 toward purchasing a new Honda vehicle. In True v. American Honda Motor Co., No. EDCV07-0287-VAP(OPX) (C.D. Cal. Feb. 26, 2010), the plaintiffs alleged that Honda used false and misleading advertisements regarding the fuel efficiency of its Honda Civic Hybrid to induce customers to pay $2,500 more for the Hybrid than for the comparably equipped standard-engine Honda Civic, even though the Hybrid gets only marginally better gas mileage. Under the proposed settlement, class members were to receive a DVD with tips on how to improve their gas mileage, an opportunity to receive a rebate on the future purchase of another Honda, and, for less than two percent of the class, an opportunity to make a claim for $100. The settlement also provided that Honda would not oppose class counsel’s motion for nearly $3 million in attorneys’ fees.

In an order entered on February 26, 2010, the court denied final approval of the settlement. Specifically, the court held that the proposed settlement’s award of a cash payment to only a select group of the class “creates the most significant obstacle to approval” of the settlement, and that the members of this sub-group were the only class members who would receive a true cash award in the settlement.

As the court explained, the Class Action Fairness Act (“CAFA”) requires federal judges to apply heightened scrutiny to a coupon settlement to determine whether the settlement is “fair, reasonable, and adequate for class members.” The attorneys general argued in their amici briefs that coupon settlements are inherently unfair because they require class members to do business once again with the company they sued in their lawsuit. While the True court held that not all coupon settlements are unfair, it found that in this instance, the proposed settlement failed in many respects, including that the rebate program was a coupon settlement that would have an extremely low redemption rate and “far less” value than plaintiffs suggested, and the vast majority of the class would receive “nothing more than a DVD of little value.”

Finally, the court also held that, in light of the low value of the settlement, an award of almost three million dollars in attorneys’ fees “would be unconscionable.”

Companies facing potential consumer class actions should note that attorneys general are reviewing the notices that settling defendants are required to send under CAFA, especially for settlements involving coupons.

(Kelley Drye & Warren LLP Associate Elissa O. Tomanda contributed to this post.)

House Committee to Hold Hearing on FDA

Tue, 09 Mar 2010 12:29:14 GMT

The House Energy and Commerce Committee's Subcommittee on Health will hold a hearing titled, "Drug Safety: An Update from the FDA" -- tomorrow, Wednesday, March 10, 2010.

At the hearing, the Food and Drug Administration will detail the Agency's views on current challenges and successes in the area of drug safety. Set to testify is Joshua M. Sharfstein, M.D., Principal Deputy Commissioner, Food and Drug Administration.

Update on CPSC Database Issues

Tue, 09 Mar 2010 11:26:43 GMT

We have posted before about one of the more controversial aspects of the Consumer Product Safety Improvement Act, the to-be-created publicly accessible database of product safety information.

The CPSIA mandates that the database be completed by March, 2011. The agency views its task as the creation of a public portal and a publicly accessible, searchable database of consumer product incident reports. Through the public portal, consumers will theoretically be able to report potential product safety hazards to CPSC in ways that are supposed to improve the quality, value, and accuracy of the data collected. Manufacturers will be able to investigate and respond to product hazard reports more quickly, and to share information with both CPSC investigators and with the public through the public database. And consumers are supposed to be able to use the public portal and database to find more information about hazards in order to keep their families safe.

Unless done very carefully, the database will be of little use to the average consumer, but subject to potential mischief in the hands of plaintiff lawyers.

Since last Fall, the CPSC has held various meetings and a two-day public workshop to gather stakeholder input on the new database. A number of affected groups have submitted comments on the implementation of the new product safety database, including the Soap and Detergent Association. A common theme for the comments is the need for the CPSC to focus on verifying and ensuring the accuracy of safety incident reports submitted to the commission. Factual accuracy and veracity are two fundamental elements underpinning a credible incident database.

CPSC needs to develop a process for addressing false and inaccurate reports that will scare consumers, harm business, and generate no additional safety gains. The commission needs to employ means to prevent the submission of fraudulent reports of harm while not discouraging the submission of valid reports. CPSC also needs to think about specific disclaimers it should make with regard to the accuracy of the information contained in the public database, and not put the governmental imprimatur on voluntary data that has not been verified. A sufficient time period should also be allocated for manufacturers to evaluate and respond to any proposed report.

Vehicle Fires- A True Risk to Drivers

Tue, 09 Mar 2010 04:46:05 GMT

U.S. statistics show that in 2006, vehicle fires were to blame for “an estimated 490 deaths, 1,200 injuries and $1.3 billion in property damage“. These numbers are staggering. They become even more so when you consider that “three-quarters of highway vehicle fires resulted from mechanical or electrical failures or malfunctions”. This ultimately means that the majority of the deaths, injuries and property damage sustained by vehicle fires could have been avoided altogether, if only the vehicle’s manufacturer had produced a malfunction-free, fire-safe car for the market.

Until stricter guidelines are made mandatory for car manufacturers, vehicle fires will continue to occur. At times, these accidents can happen unexpectedly, without warning or notice, and even without a collision. It is wise to educate yourself on steps you can take to prevent these fires, and what to do should you become a vehicle fire victim. Here are a few tips to keep in mind:

-Maintain your vehicle well. Have repairs done as needed. Have your vehicle inspected at least once a year.

-Keep up-to-date on recalls that pertain to your vehicle. For example, the latest Honda Fit recall is due to a fire hazard that can be caused just from having water leak in through the window.

-Be aware of the noises your car makes. Make an effort to turn down the radio and just listen to the way your car is running from time to time. Anything that sounds out of the ordinary is worth getting checked out.

-Periodically check for wear and tear on your vehicle. Be sure all bolts and wiring are secure. Check for cracked pipes or hoses. If anything is out of place or appears worn out, have it repaired as soon as you can.

-If your car does catch on fire, pull over to the side of the road. Turn the car off. Get everyone out of the vehicle, and move at least 100 feet away. Keep everyone together and away from the road or highway. Call 911.

-Do not attempt to open the hood of a burning car.

-Do not attempt to put the fire out of a burning vehicle. Statistics show that “one-third of non-fatal highway vehicle fire injuries occurred when civilians attempted to fight the fire themselves”.

For more information on vehicle fires and the risk they impose on drivers and their families, please visit:

http://www.nfpa.org/categoryList.asp?categoryID=1123&URL=Safety%20Information/For%20consumers/Vehicle%20fires&cookie_test=1

http://www.firehouse.com/forums/showthread.php?t=74895

http://www.nfpa.org/assets/files//PDF/Research/VehicleFires.pdf

Vehicle fires are serious accidents that can leave victims disfigured or disabled for the rest of their lives. Many times the financial loss of a vehicle or other property damage becomes an enormous burden for families. And of course, no one can replace the innocent lives that these catastrophic accidents claim. If you have been injured or suffered loss as a result of a vehicle fire, don't forget you may have a legal claim against the manufacturer. Without a doubt the manufacturer will try to lay blame elsewhere, as seen in the Toyota incidents, and create illusions that make your story seem false

But the lawmakers questioned whether Toyota had fully explored the problem. According to the committee's review of 75,000 documents from Toyota, including 20,000 in Japanese, the automaker dismissed many sudden acceleration complaints as driver error.

After the launch of probes by two committees, Toyota hired an outside engineering firm, Exponent, to run tests on its electronic throttle controls. Executives later cited an interim report by Exponent finding no fault with the controls as evidence that the system worked as designed.

But the committee said Exponent only tested six vehicles and did not conduct any testing of real-world interference. Two outside experts who reviewed the report said it was so limited it was of little value. (read more)

However, your legal rights should not be forgotten. If you or a loved one have suffered loss or injury as a result vehicle fire, we’d like to help. Please contact the law offices of D. Hardison Wood to speak with an attorney who will fight to make sure your rights are protected.
/ab

Hidden Risks Exist in Bond Exchange Traded Funds (ETFs)

Mon, 08 Mar 2010 23:24:41 GMT

Bond exchange traded funds carry hidden risks. In a recent Wall Street Journal article, Sam Mamudi cautioned investors seeking safety in bond exchange traded funds to be aware of hidden risks that can magnify the losses and limit the gains...

Exchange traded funds are generally regarded as liquid, transparent investment and trading vehicles. But that reputation is only valid for the large, high-volume funds like the S&P SPDR, and not for other less liquid exchange traded funds. Bond exchange traded funds, in particular, are less liquid than most investors realize, and, as a result, the share price, dictated by market demand, is often different from its net asset value. In other words, investors often buy and sell such shares at a premium or discount relative to the net asset value.

Experts agree. The problem is "an inherent flaw in non-Treasury bond ETFs," said Matt Hougan, managing director of ETF analytics for Index Publications. "The corporate-bond market is notoriously illiquid." And given ETFs' need for liquidity, he said, "it's a square peg in a round hole."

The growing popularity of bond exchange traded funds have created demand that pushed shares to premiums. If interest rates start to rise, however, many investors who bought bond exchange traded funds at a premium could end up selling them at a loss.

In his article, Mr. Mamudi points to SPDR Barclays Capital High Yield Bond ETF (trading symbol: JNK) as an example of how bond ETF share prices can move differently to their value. As of Friday, Feb. 19, the SPDR shares traded at almost a 1% premium to net asset value. By Tuesday afternoon, the fund's shares traded at a slight discount to NAV. Moreover, by mid-afternoon on Tuesday, the fund's share price had fallen about 1% from the open while its NAV, the measure of the value of its assets, was up 0.6%. Several days later, the shares were back at a premium, closing at $38.79 compared with their NAV of $38.34.

In the fourth quarter of last year another high-yield bond exchange traded fund, (HYG), posted both premiums and discounts to its share value. On Dec. 14, the premium peaked at 2.15%, while on Oct. 1 it was trading at a discount of 0.9%. In one quarter, the exchange traded funds saw only five of sixty-four trading days when the share price was within 0.5% of its net asset value.

The swings were even wider in the first quarter of 2009. The iShares fund had several days during that period when premiums were more than 6% higher than the net asset value and also days when discounts were greater than 3%. In the same quarter, SPDR Barclays Capital High Yield Bond ETF swung from premium of more 12% on Jan. 5, 2009, to a discount of 4.9% on March 2.

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