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We’ve posted before, mostly in the context of our critiques of the ALI’s Aggregate Litigation Project, about the inherent problems with permitting large class actions involving the purchase of consumer products. We’ve pointed out that, in the products field at least, not a single certified litigation (as opposed to settlement) class action has survived appellate review in over ten years.
Well, chalk up another one.
The second circuit just reversed the certification of a monstrous class action that sought $800 billion in supposed “damages” for essentially everyone who purchased so-called “light” (low tar/nicotine) cigarettes.
Since it’s not a drug case, we’ll just hit the high points that would also be relevant to our clients.
First off, we love the opening lines of the opinion: “[N]ot every wrong can have a legal remedy at least not without causing collateral damage to the fabric of our laws.” And also “Rule 23 is not a one-way ratchet, empowering a judge to conform the law to the proof.” Slip op. at 4 (that’s right the first paragraph of the opinion is partially on page four – the number of counsel involved gives some idea of the magnitude of the class).
These points are perhaps key to the whole problem of class action litigation. First, class action litigation plays to the sense of judicial triumphalism – the notion that litigation can solve anything. Second, class action litigation is inherently corrosive of the individualized characteristics of almost all legal claims. To justify these huge classes, the courts that certify them have to scrape away all the rough edges that are inherent in common law adjudications.
The Second Circuit forcefully says “no.” Hopefully, it won’t happen again, at least in that circuit.
The court then emphasizes:

[A] district judge may not certify a class without making a ruling that each Rule 23 requirement is met and all evidence must be assessed as with any other threshold issue, whether or not any such assessment also bears on the merits of the case.

Slip op. at 8-9 (citing and quoting Miles v. Merrill Lynch & Co., 471 F.3d 24, 27 (2d Cir. 2006)). We spotted Miles as an important case when it first came down. Just how important is demonstrated in McLaughlin.
One of the points that we criticized the ALI’s project was the ease with which it expanded the very narrow category of fraud claims supposedly based on a “common body of proof.” McLaughlin clamps down hard on this type of allegation, holding that the alleged “uniform misrepresentations speak to only half of the problem:

But proof of misrepresentation — even widespread and uniform misrepresentation — only satisfies half of the equation; the other half, reliance on the misrepresentation, cannot be the subject of general proof. Individualized proof is needed to overcome the possibility that a member of the purported class purchased [the product] for some reason other than the belief [in the claimed misrepresentation.]

Slip op. at 12 (emphasis added). It’s not just cigarettes, but all purchases of “consumer products” that present this barrier to class certification. People buy products for a great many reasons, and those reasons cannot be homogenized into some huge class action, not without doing improper violence to the fabric of the substantive law. The contrary position was just another variant of “fraud on the market,” slip op. at 14 n.5, which does not exist as a legal theory outside of the securities realm:

We do not think that the [fraud on the market] presumption, or the district court’s variation of it, applies in this case; we cannot assume that, regardless of whether individual smokers were aware of defendants’ misrepresentation, the market at large internalized the misrepresentation to such an extent that all plaintiffs can be said to have relied on it. [Fraud on the market] involved an efficient market … the market for consumer goods, however, is anything but efficient.

Slip op. at 15 (emphasis added). The fact that the “market” did not in fact respond to the claimed exposure of the supposedly false marketing by immediately forcing a price reduction demonstrates how different (“inefficient”) the consumer market really is. Slip op. at 15-16. Thus “a financial transaction does not usually implicate the same type or degree of personal idiosyncratic choice as does a consumer purchase.” Slip op. at 17 n.7. See also slip op. at 17 n.7 (distinguishing Klay v. Humana (a contractual payment case) as “very different from assuming that most individuals purchase a consumer good in reliance upon an inference that they draw from its marketing and branding rather than for some other reason”) – the Klay case being a linchpin of the current draft of the ALI’s draft §2; slip op. at 17-18 (rejecting any “presumption of reliance” in cases where consumers “could have elected to purchase [a product] for any number of reasons”).
McLaughlin should thus mark the end (in the Second Circuit anyway) of attempts to pound the square peg of class-wide reliance theories from financial cases into the round hole of litigation over purchase of consumer products. Not a moment too soon in our estimation. Drugs and medical devices would seem no different than other mass-marketed products in this respect. They may be ordered off the market by the FDA, but the kind of instantaneous price shifts characteristic of the securities markets simply don’t happen with prescription medical products.
McLaughlin then goes through and invalidates, one by one, each place where the district court had allowed the plaintiffs to substitute statistical models for real proof:

  • Noting the “difficulty” of basing reliance upon a tautological expert assumption that amounted to consumers necessarily preferring a “safer” product to a “less safe” product. Slip op. at 16-17 n.6.
  • Rejecting purported classwide proof of loss based upon an assumption the improper marketing “led to an increased market demand for [the product], which drove up the [its] price.” Slip op. at 20-21.
  • Rejecting both “the loss of value theory and the price impact model … because neither of these theories is plausible as a matter of law, because both would lead to an impermissible fluid recovery.” Slip op. at 22.
  • “[O]ut-of-pocket losses cannot be shown by common evidence because they constitute an inherently individual inquiry: individual [consumers] would have incurred different losses depending on what they would have opted to do, but for defendants’ misrepresentation.” Slip op. at 22-23.
  • No recovery theory based upon loss of only a “benefit of the bargain” can satisfy a legal requirement for actual injury to “business or property,” since benefit of the bargain is only loss of an “expectation interest.” Slip op. at 25-26.
  • Even if a “price impact” from increased or reduced demand “could be proven by common evidence, as with the loss of value model, plaintiffs have failed as a matter of law to adduce sufficient facts to show that the price impact model is a tenable measure of harm.” Slip op. at 28.
  • Such an artificial statistical “model exemplifies the kind of vague inquiry into damages that the Supreme Court forbade.” Slip op. at 29.
  • Allowing “plaintiffs [to] prove collective damages on a class-wide basis, and individual plaintiffs would then [to] claim shares of this fund … [is] fluid recovery [that is] forbidden in this circuit.” Slip op. at 31.

Finally, beyond the problems with particular applications of statistical proof claims involving allegedly deceptive consumer marketing loom more global problems. To make sure that the plaintiffs didn’t just go back to the district court and invent still other statistical modes to replace those that were rejected, the court brought to bear the big guns: “reject[ing] plaintiffs’ proposed distribution of any recovery they might receive because it offends both the Rules Enabling Act and the Due Process Clause.” Slip op. at 32 (emphasis added).
In other words, any and all of this reliance upon statistical modeling does so much violence to the substantive law that it’s both beyond the permissible use of Rule 23 and unconstitutional. In a word, “stop”:

But such an aggregate determination is likely to result in an astronomical damages figure that does not accurately reflect the number of plaintiffs actually injured by defendants and that bears little or no relationship to the amount of economic harm actually caused by defendants. This kind of disconnect offends the Rules Enabling Act, which provides that federal rules of procedure, such as Rule 23, cannot be used to “abridge, enlarge, or modify any substantive right.”

Slip. op. 32-33 (quoting 28 U.S.C. §2072(b)) (emphasis added). That’s the statutory holding.

When fluid recovery is used to permit the mass aggregation of claims, the right of defendants to challenge the allegations of individual plaintiffs is lost, resulting in a due process violation…. [A]ctual injury cannot be presumed, and defendants have the right to raise individual defenses against each class member.

Slip op. at 35 (emphasis added). That’s the constitutional holding. Although the court did not cite another recent due process case, Philip Morris v. Williams, the Supreme Court’s decision in Williams, as we have already mentioned, holds that “the Due Process Clause prohibits a State from punishing an individual without first providing that individual with an opportunity to present every available defense.” 127 S.Ct. at 1063. The Second Circuit has thus extended the reasoning of Williams to compensatory damages as well.
This is heavy artillery. The Rules Enabling Act and Due Process Clause are only infrequently hauled out in appellate class action decisions, which almost always turn on the plaintiffs’ inability (like we said, it’s been over a decade since any federal appellate court has permitted a product liability class action) to satisfy the elements of Rule 23 . That not just one, but both, of them are invoked in McLaughlin would seem to us an indication of how seriously the Second Circuit viewed the erroneous certification of an potential $800 billion class action.
We think that is a very good thing. Class actions have no proper place in cases involving the sale of consumer products (especially prescription medical products), for the precise reasons stated in McLaughlin – because consumers purchase (and doctors prescribe) products for a broad range of reasons that just don’t fit within the strait jacket of uniform proof that class actions demand.