By Robert B. Barnett Jr., J.D.
A divided U.S. Court of Appeals in San Francisco vacated a lower court’s order certifying for settlement purposes a nationwide class of owners and lessees of Hyundais and Kias, alleging that the auto makers misrepresented their vehicles’ fuel efficiency. The lower court failed to apply California choice of law rules before concluding that questions common to class members predominated over questions affecting only individual members. Under these facts, the appellate court said, predominance was defeated by variations in state consumer protection laws that precluded the application of California law to consumers who were not Californians. On reasonableness of attorney fees, the Ninth Circuit also ruled that the district court failed to cross-check its fee award, which used the lodestar method, against the percentage-of-recovery method to determine overall reasonableness. The dissent contended that the majority, in dealing a "major blow" to multistate class actions, relied on arguments never raised, contravened precedent, and disregarded reasonable factual findings (In re Hyundai and Kia Fuel Economy Litigation, January 23, 2018, Ikuta, S.).
In 2011, a consumer advocacy group discovered that Hyundai and its affiliate Kia Motors had overstated the fuel efficiency of many of their vehicles. The Environmental Protection Agency (EPA) launched an investigation, which confirmed the findings. Hyundai and Kia then announced a voluntary Lifetime Reimbursement Program in an attempt to reimburse those owners who were short-changed by the fuel efficiency differences between what they bought and what they thought that they bought. While the EPA’s investigation was underway, car purchasers filed a putative nationwide class action in Los Angeles county court, which Hyundai and Kia removed to federal court.
When the consumers moved for class certification, the court issued a tentative ruling, expressing confidence that both the common question and the predominance requirements could be met, but raising doubts about class certification because California law could not be applied to out-of-state class members. No final ruling was issued. Meanwhile, numerous other class actions had been filed, ultimately leading to 56 actions against Hyundai and Kia being transferred to the California court. Shortly after transfer, the original consumers in the California case announced that they had reached settlement with Hyundai and Kia for a single nationwide class. The proposed settlement agreement included a request that the court certify a nationwide class of all Hyundai and Kia owners of affected vehicles purchased prior to November 2, 2012. Several compensation options were offered, as well as an opt-out provision. Not all plaintiff groups were happy with the settlement, including a group who had filed suit in Virginia but who had been swept into the California litigation. They contended that the settlement would constrict what they could otherwise obtain under Virginia law. The district court then circulated a draft opinion granting certification, but acknowledging that it would need to do an extensive choice of law analysis if the case went to trial. It acknowledged that concerns about variations in state laws would probably prevent class certification at trial. A couple of months later, without addressing those concerns, the court granted certification. The court also approved attorney fees for lawyers representing the various groups. All claims, other than those by consumers who had opted out, were dismissed. Five groups opposed to the settlement filed consolidated appeals, objecting to the class certification and to the attorney fees.
Choice of law. The majority revisited the district court’s decision not to undertake a choice of law analysis. The crucial decision, they said, was Mazza v. American Honda Motor Co., 666 F.3d 581 (9th Cir. 2012), a case very much like this one. This court in that case rejected class certification because California’s consumer protection statutes could not be applied to a nationwide class with members in 44 jurisdictions. The court in Mazza ruled that (1) material differences existed between the California misrepresentation claims and the laws of the other states, (2) each of the 44 states had a strong interest in applying their own consumer protection laws, and (3) if California law were applied to the entire class, the other states would be impaired in the efforts to calibrate liability to foster commerce. The Mazza opinion stated that a district court is required to apply California’s choice of law rules to determine whether California law could apply to all plaintiffs in the nationwide case. In California, that means applying the governmental interest test. No one disputes that the district court never undertook that test. As a result, the Ninth Circuit concluded that the district court committed a legal error. The court’s reasoning that the settlement context relieved it of the obligation to undertake a choice of law analysis was "wrong as a matter of law."
Predominance. Under Mazza, If the district court determined that it had to apply the law of each state, the next analysis was whether variations in those laws defeated the predominance requirement of Federal Rules of Civil Procedure Rule 23(b)(3). The Ninth Circuit ruled that the district court erred when it failed to acknowledge evidence presented by Hyundai and a consumer group that the laws in various states were materially different from those in California. The Ninth Circuit also concluded that the district court erred in failing to make a final ruling as to whether the material variations in those state laws defeated predominance. As with the choice of law analysis, the district court’s reasoning that the settlement context excused it from examining predominance was wrong as a matter of law.
Settlements. As the U.S Supreme Court said in Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997), the class certification analysis should be heightened in the settlement context. The district court erred when it went the other way, giving less scrutiny. Furthermore, by acknowledging in its draft ruling that the class would probably not be certified for trial because of the choice of law concerns, the court altered the negotiating strengths of the parties. If Hyundai and Kia know that the court will not certify the class for litigation, why settle? If the consumers know that they cannot get class certification, they lose the leverage that a trial offers. On a final note, the appellate court stated that the district court erred when it said that it could avoid the question of the applicability of the other state laws on the ground that the proposed settlement was fair. This conclusion violates Amchen’s requirement that the analysis be vigorous. In ruling that the district erred in certifying the settlement class, the Ninth Circuit specifically stated that it was not ruling that the district court was foreclosed from certifying a class or subclass, although it did note that Mazza found that no such class was possible under similar facts.
Misleading statements. The Ninth Circuit also stated that the district court erred even if it had restricted the class to California consumers because it failed to analyze whether all class members were exposed to Hyundai’s and Kia’s misleading statements. Individual questions of reliance would preclude those car owners from being part of this class. Under some circumstances, class members may be presumed to have been exposed to the advertisements. In this case, however, no such presumption could be made. The district court failed in its obligation to define the relevant class to include only those members who were exposed to allegedly misleading advertising.
Attorney fees. The Ninth Circuit addressed attorney fees because the settlement class might yet be determined after remand. In determining the reasonableness of the fees, the court employed the lodestar method, which bases the fee on hours worked multiplied by a reasonable hourly rate. In this Circuit, however, reasonableness should be cross-checked by also using the percentage-of-recovery method, which applies a percentage to the common settlement fund, typically 25 percent. The district court failed to undertake the cross-check. In fact, the court never calculated the full value of the settlement. The court also failed to explain adequately why it chose to apply a multiplier for class counsel, other than to acknowledge the complexity and volume of work, especially given the argument that the settlement only conferred modest benefits on class members.
Dissent. In a blistering rebuttal, the dissent stated that the majority erroneously shifted the burden of whether foreign law governs from the objectors who assert such claims to the district court or the class counsel. This shift, the dissent said, burdens already overloaded courts, creates a circuit split, and runs afoul of Erie R.R. v. Tompkins, 304 U.S 64 (1938), which requires that the court in California sitting in diversity apply California law, including California choice-of-law rules. By excluding those who may not have seen the advertisements, the majority misapplied the rule that says that proof of deception is to the public, not to any individual. In addition, the dissent argued that the majority disregarded the usual deferential review and misread the record in contesting the attorney fee awards. Turning to the specifics, the dissent thought that predominance was readily established. Class actions should not be decertified simply because of differences in consumer protection laws. The objectors also failed to meet their burden under California’s government interest test because they never explained how any of the test’s three elements were met. The majority violated Erie R.R. by creating the possible variations between federal and state outcomes that Erie R.R. sought to avoid. The dissent thought that the court should rely on its own decision in Hanlon v. Chrysler Corp., 150 F.3d 1011 (1998), which affirmed certification under Rule 23(b)(3) under similar facts. It saw the Mazza decision as a "rare exception" to the general rule that predominance is a test readily met in consumer class actions. And the dissent faulted the majority for failing to adhere to its deferential standard of review, which, the dissent said, accords a district court noticeably more deference in the class certification context. Finally, the dissent believed that the district court calculated attorney fees using both the lodestar method and the percentage-of-recovery method, which the majority failed to appreciate. "In decertifying this class of hundreds of thousands of car owners who were deceived," the dissent said, "the majority effectively ensures that no one will receive anything." Finding no error, the dissent would have affirmed.
The majority in the 2-1 opinion vacated the district court’s order granting class certification and remanded for further proceedings.
The cases are Nos. 15-56014, 15-56025, 15-56059, 15-56061, 15-56064, and 15-56067.
Attorneys: James B. Feinman (James B. Feinman & Associates) for James Ben Feinman, John Gentry, Linda Ruth Scott, Danielle Kay Gilleland, Joseph Bowe, Michael Desouto. Benjamin W. Jeffers (Dykema Gossett PLLC) for Kia Motors America Inc. and Kia Motors Corp. Shon Morgan and Joseph Robert Ashby (Quinn Emanuel Urquhart & Sullivan, LLP) and Dean Hansell (Hogan Lovells LLP) for Hyundai Motor America.
Companies: Hyundai Motor America; Kia Motors America Inc.; Kia Motors Corp.
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