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February 5, 2018Client Alert

Ninth Circuit Strikes Down Nationwide Class Action Settlement

In a surprising 2-1 decision, the 9th Circuit, In re Hyundai & Kia Fuel Economy Litigation, vacated a nationwide class action settlement and remanded the case back to the district court for another decision on class certification. The decision is receiving lot of attention because of its potential impact on nationwide class action settlements. The Ninth Circuit held that the district court failed to analyze whether differences in state law precluded a finding that common questions of law and fact predominated under Rule 23(b)(3).

The case began when a consumer advocacy group contacted the EPA to initiate an investigation in Hyundai’s and Kia’s fuel efficiency test procedures back in 2011 because the group believed that Hyundai and Kia had overstated their fuel efficiency estimates.  The group turned out to be correct as the EPA’s investigation confirmed that Hyundai and Kia had used improper test procedures to develop the fuel efficiency information submitted for certain 2011, 2012 and 2013 vehicles. 

In January 2012, while the EPA investigation was still taking place, the first putative nationwide class action was filed in California state court against Hyundai. The complaint alleged claims under California’s consumer protection laws and common law based on Hyundai’s alleged false advertising of fuel efficiency for 2011, and 2012 vehicle models. The case was removed to federal court and in federal court the plaintiffs sought certification of a nationwide class. In opposing the motion, Hyundai argued that there was no predominance under Rule 23(b)(3) because differences in state consumer protections laws precluded the application of California law to consumers who are not Californians, and it supported this argument with a thirty-four page appendix detailing the numerous differences in states consumer laws.

In a tentative ruling on class certification, the district court stated that it was unlikely to certify a nationwide class where California law applied to out-of-state consumers as choice-of-law principles would not permit applying California law to such out-of-state consumers; and, once there was a need to apply numerous states’ consumer laws, common questions of law and fact would no longer predominate. Before the district court could make a final decision on class certification, a flurry of additional putative class action cases were filed across the country against Hyundai and Kia alleging that they misrepresented the fuel efficiency of their vehicles through advertising and Monroney Stickers. Eventually all cases were presented to a Multidistrict Litigation judicial panel who transferred all cases to the Central District of California where the first case (Espinosa action) had been pending. In total, 56 actions were transferred to the Central District of California. 

Shortly after the MDL Judicial Panel transferred all cases, in February 2012, the parties in the Espinosa action (and a couple other actions) informed the court that they had reached a nationwide class settlement with Hyundai and Kia. The parties agreed that the district court should certify a nationwide class of all persons who were current owners, former owners, and lessees of specified Hyundai and Kia vehicles on, or before November 2, 2012. In April 2013, the district court ordered discovery to confirm the facts upon which the settlement was based. At that time, a different group of plaintiffs filed a new lawsuit against Hyundai in the Western District of Virginia and in November 2013. The Virginia action was transferred to the Central District of California under the MDL Panel’s rulings on tag-along cases. 

Then, in December 2013, the Espinosa plaintiffs moved for class certification and preliminary approval of the nationwide settlement based on the results of the confirmatory discovery.  The Virginia action plaintiffs opposed class certification and sought remand back to Virginia because Virginia’s laws provided a materially different remedy to Virginia-based consumers. The district court noted that if the case had needed to go to trial, it would have needed to do an extensive choice of law analysis. However, because the class certification decision was being made in the settlement context, an analysis was not needed, and that any concerns about different state laws could be addressed as part of the final Rule 23(e) hearing. Accordingly, the district court granted class certification and preliminarily approved the settlement. 

Finally, in June 2015 the district court gave its final approval of the class settlement, including attorney’s fees in the amount of $8.55 million with the agreement providing for an aggregate lump sum available for class members in the amount of $210 million. The district court rejected objections to the attorney’s fees award being excessive and not in proportion to the benefit conferred on class members, noting that the fees did not impact class recovery because they were awarded separately. Various objectors to the settlement appealed challenging class certification, approval of the settlement as fair and adequate, and approval of attorneys’ fees as reasonable.

In a 2-1 decision, the 9th Circuit vacated the lower court’s class certification.  The majority reasoned that the district court was required to apply California’s choice of law rules to determine whether California law could apply to all plaintiffs in the nationwide class, or whether the court had to apply the law of each state, and if so, whether variations in state law defeated predominance. The district court’s failure to engage in any choice of law analysis was legal error.  Additionally, according to the majority, the fact that the decision to certify the class was made in the settlement context did not change the analysis.  Instead, the district court should have paid heightened attention to the predominance issue in the settlement context.  The majority further reasoned that based on Supreme Court precedent the fairness hearing under Rule 23(e) was no substitute for rigorous adherence to those provisions of the Rule designed to protect absent class members, such as the predominance inquiry.  Accordingly, the majority vacated the class certification ruling and remanded for the district court to again decide class certification under the proper analysis stating, “The district court failed to conduct a rigorous inquiry into whether the proposed class could meet the Rule 23 prerequisites on the mistaken assumption that the standard for certification was lessened in the settlement context.” Finally, the majority also challenged the reasonableness of the attorney’s fees award by reminding the district court that on remand it should also consider the proportionality of the award to the settlement value for the class members before awarding the fees. 

Judge Nguyen, writing in dissent, argued that the district court’s decision should be affirmed.  Judge Nguyen reasoned that Rule 23’s predominance inquiry had been met because questions, such as whether the fuel economy statements were in fact accurate, and whether defendants knew the statements were false or misleading would predominate over individualized issues. Additionally, Judge Nguyen explained that it had been the objectors’ burden to prove that foreign law, rather than California law, would apply and that they had failed to carry that burden.  She believed that the majority had improperly flipped the burden onto the district court or class counsel to address choice of law issues when the objectors had failed to meet their burden on the issue.  Judge Nguyen chastised the majority for reassigning the burden under California’s choice-of-law rules and noted that such a reassignment violated the Erie doctrine.  Judge Nguyen also disagreed with the majority’s issues regarding the attorney’s fee award.  She believed the fee award should have been affirmed as well.

The 9th Circuit’s opinion in In re Hyundai may have several implications for litigants in a potential nationwide class action, or any other class action for that matter. First, settlement in multi-state class actions just became more difficult. To date, district courts often grant class certifications when they are attached to acceptable class wide settlements with little inquiry into and application of Rule 23’s factors, including the predominance factor under Rule 23(b)(3).  This is precisely what the district court did in Hyundai.  However, at least in the 9th Circuit, such practices are now clearly improper; instead, a district court must closely examine even an agreed upon class certification before even getting to the settlement portion. This can create practical problems when, to reach settlement, parties want to get to the broadest class possible for certification to protect defendants from getting sued for similar and related issues in the future.  Under the majority’s reasoning in Hyundai, such broad classes will come under greater scrutiny; and thus, may not pass muster, which in turn will destroy any settlement predicated on obtaining certification of the agreed upon class. Second, In re Hyundai could prove to be a valuable tool for defendants planning to fight certification. The majority reasoning makes it difficult for district courts to ignore significant variations in state laws when looking to certify a multi-state class. In the end, the 9th Circuit has provided more teeth to the Rule 23 provisions in the context of a nationwide class actions, requiring lower courts to do more than rubber stamp fair and adequate settlements and requires additional consideration on certification.

If you are interested in discussing how Michael Best can assist you in handling class action lawsuits please contact your Michael Best attorney, or members of the Michael Best Class Action Team, including Michelle Dama (608.283.0118, mldama@michaelbest.com), and Albert Bianchi, Jr. (608.283.4425 abianchi@michaelbest.com).

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