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The Class Action Weekly Wire – Episode 70: Sanctions Issues In Class Actions


Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and special counsel Rebecca Bjork with their discussion of key sanctions rulings in the past 12 months of class action litigation.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jennifer Riley: Thank you for being here again for the next episode of our weekly podcast, the Class Action Weekly Wire. I’m Jennifer Riley, partner at Duane Morris, and joining me today is special counsel Rebecca Bjork. Thank you so much for being on the podcast today, Rebecca.

Rebecca Bjork: Great to be here, Jen. Thank you for having me.

Jennifer: Today we have a little different topic – we are discussing significant decisions granting or denying sanctions in class action cases. Rebecca, what are some of the reasons that a court could grant sanctions in a class action?

Rebecca: Sanctions are usually issued in response to a party violating court procedures, or abusing the judicial process in some way. They are more simply thought of as penalties. In civil cases, sanctions are typically in the form of a monetary fine. But the most extreme sanction imposed in civil cases, including class actions, can be dismissal with prejudice of the filing party’s complaint or dismissal of the answer of the responding party. In either of those cases the sanctioned party would have no further recourse available, and the case would be over with judgment entered against them.

Jennifer: Given the cost of defending a class action, corporate defendants also sometimes move for sanctions if the claims are frivolous. For instance, the Sixth Circuit issued a ruling on sanctions in Garcia, et al. v. Title Check, LLC. In that case, the plaintiff filed a class action against the defendant alleging that its buyers fee violated the Michigan General Property Tax Act. In that one, the district court had dismissed the plaintiffs’ claims, finding that the fee was not prohibited by the statute, and then the defendant moved for sanctions against the plaintiffs’ attorneys on the ground that the case was frivolous and had forced the defendant to incur unnecessary legal fees. There the district court granted the motion for sanctions, and ordered the plaintiffs’ counsel to pay attorneys’ fees and costs north of $73,000. On appeal, the Sixth Circuit then affirmed the district court’s ruling in that when the plaintiffs argued that the district court erred in imposing the sanctions because the legal issues in the case were debatable, and because the district court misunderstood Michigan law.

The Sixth Circuit, however, agreed with the district court’s conclusion that the plaintiffs’ counsel had unreasonably pursued a frivolous claim based on an implausible interpretation of the statute. The Sixth Circuit found the plaintiffs should have known that their claims lacked merit. It also rejected the plaintiffs’ argument that sanctions should have been limited to the specific filings relating to the unnecessary claims. Instead, the Sixth Circuit held that the entire action was frivolous and vexatious. For these reasons it affirmed the district court’s ruling, and imposed the sanction on the plaintiffs’ counsel.

Rebecca: A really interesting case involving sanctions. Last year in a class action was AFL-CIO v. LSRI,LLC, where the court entered more serious sanctions. The plaintiffs were two AFL-CIO locals, Local 846 and Local 847, and their employee benefit plans, and the plaintiffs filed a class action alleging that the defendant failed to pay contributions for workers covered under a labor contract for a project involving SpaceX in Cape Canaveral, Florida, in violation of ERISA. Plaintiffs further asserted, and this is important for the sanctions piece of this case, that the actual amounts that plans were owed could not be determined without an audit of the defendant’s records. So the sanctions issue arose in the case after the defendant failed to appear after being served with a complaint, and the court subsequently entered a default order against it. But then the court also ordered the defendant to submit its books, ledgers, payroll records, bank statements, other financial documents reflecting the hours worked by the defendant’s employees. The defendant did not comply with this order, so the plaintiffs moved for an order holding the defendant in contempt of court. After the defendant failed to appear at the hearing on the motion for contempt, the court granted the motion finding the defendant in contempt, and further imposed a compliance fine of $200 per day, and in addition awarded the plaintiffs’ attorneys’ fees and costs. Subsequently, the plaintiffs had to file another motion – and this is surprising – they sought the arrest of the defendant’s principal as a last resort, to obtain compliance with the court’s orders. The court concluded that the monetary sanctions had not been effective in inducing the defendant to comply, and therefore determined that the arrest of the defendant’s principal was appropriate, and so, for these reasons, the court ordered the arrest of the defendant’s principal for civil contempt.

Jennifer: That’s a great example. Rebecca. Sanctions are also deemed warranted in some cases where a party is not forthright with its discovery responses. A great example of that is in In Re Keurig Green Mountain Single-Serve Coffee Antitrust Litigation, where death knell sanctions were imposed. The plaintiffs filed a class action alleging that the defendants violated antitrust laws by operating a monopoly, by using exclusive dealings and exclusionary product design. The plaintiffs filed a motion for sanctions asserting that the defendant Winn Dixie failed to respond to discovery. The court granted the motion, and ordered Winn Dixie to pay attorneys’ fees and costs. The court found that Winn Dixie repeatedly and consciously failed to comply with three court orders indicating that lesser sanctions would not be effective.

Rebecca: Right. Federal courts have wide discretion in calibrating sanctions orders. In 2023, a ruling in Lopez, et al. v. Fun Eats & Drinks, LLC demonstrated how sanctions can include civil contempt orders. Plaintiffs moved for contempt and an award of attorneys’ fees after the defendants violated multiple court orders. The court granted that motion, and had previously entered a final judgment against the defendants, and awarded the plaintiffs more than $538,000, plus attorneys’ fees. So the plaintiffs moved for additional attorneys’ fees, and the defendants failed to respond to the motion. The plaintiffs thereafter served post judgment discovery on the defendants, and they again failed to respond. Plaintiffs moved to compel discovery, and the defendants counsel responded by moving to withdraw as counsel of record due to the defendant’s failure to communicate with them regarding the post judgment, discovery. The court ended up denying the defendant’s motion, and granted the plaintiff’s motion to compel, and the defendants once again failed to respond, and the plaintiffs then resorted to filing their contempt motion. The court granted the motion, holding the defendants in contempt for the refusal to comply with the court’s orders and respond to the post judgment discovery, and also held the defendant’s attorney in civil contempt for his failure to appear at the show cause, hearing, as ordered by the court. So that in the end the court granted the plaintiff’s motion, and ordered the defendants and defendants counsel to pay for the plaintiff’s additional attorneys, fees in the amount of over $5,000.

Jennifer: Thanks, Rebecca, that is a great example as well. Were there any notable rulings that you can think of where sanctions were denied over the past year?

Rebecca: Well, actually, most times sanctions motions are denied, and that is simply because the moving party has not been able to demonstrate bad faith or willfulness by the other party. One example is Colucci, et al. v. Health First, Inc., where the plaintiffs allege anticompetitive practices in the acute healthcare market against the defendant. The court denied the motion for class certification due to lack of standing to represent the class, and the parties later stipulated to dismiss the case. So after that the defendant sought sanctions under Rule 11, arguing that the plaintiff’s counsel had no factual or legal support for asserting standing in the first place. This court denied the motion for sanctions, stating that the arguments in support of class certification were not lacking in evidentiary or legal support sufficient to justify an order granting sanctions, and the defendant also failed to demonstrate any improper purpose in prosecuting the case by the plaintiff’s attorneys.

Jennifer: Thanks, Rebecca, great insights and analysis. I know that these are only some of the cases that had interesting rulings on motions for sanctions over the past 12 months, and that we are apt to see some notable rulings over the remainder of 2024 as well. Rebecca, thanks for being here and to our audience listeners – thank you so much for tuning in.

Rebecca: Thank you, Jen.

Posted on by Class Action Defense

The Seventh Circuit Finds There Is No “Loophole” To Sue A Texas Company In A Nationwide Collective Action In A Wisconsin Federal Court

By Gerald L. Maatman, Jr., Gregory Tsonis, and Ryan T. Garippo

Duane Morris Takeaways:  On August 16, 2024, in Luna Vanegas, et al. v. Signet Builders, Inc., No. 23-2964, 2024 WL 3841024 (7th Cir. Aug. 16, 2024), the U.S. Court of Appeals for the Seventh Circuit found that, in a Fair Labor Standards Act (“FLSA”) collective action, a district court must have personal jurisdiction over a defendant for every single one of the would-be plaintiffs’ claims.  Those plaintiffs for whom personal jurisdiction does not exist must proceed in a forum where the corporate defendant is essentially at home.  This decision is a substantial win for employers and helps prevent them from being dragged into nationwide lawsuits far away from where they do most of their business.

Case Background

Signet Builders, Inc. (“Signet”) is both incorporated and headquartered in Texas, but its business spans across the nation.  As part of its business, Signet employs a small subsect of its employees in Wisconsin who are primarily tasked with building livestock houses.  Plaintiff Jose Ageo Luna Vanegas (“Luna Vanegas”) was one of those workers.  In 2021, he sued Signet in the U.S. District Court for the Western District of Wisconsin claiming that he was not paid overtime, in violation of the FLSA.  Luna Vanegas, however, did not bring his claims on an individual-plaintiff basis, but rather sought to litigate his FLSA claims on a nationwide collective action basis in an effort to magnify the scope of the litigation.

After Luna Vanegas filed his lawsuit, a complicated legal battle unfolded.  Signet filed a motion to dismiss and argued that “Luna Vanegas’s work fell within a provision of the FLSA that exempts agricultural workers from its overtime requirements.”  Luna Vanegas v. Signet Builders, Inc., 554 F. Supp. 3d 987, 989-90 (W.D. Wis. 2021) (citing 29 U.S.C. § 213(b)(12)).  The district court held that Luna Vanegas “performed his work on farms, and the work he performed — constructing livestock containment structures — was incidental to farming,” and therefore dismissed his case.  Id. at 993.

Luna Vanegas appealed that dismissal to the Seventh Circuit. It reversed the district court — holding that dismissal was premature.  Luna Vanegas v. Signet Builders, Inc., 46 F. 4th 636, 645 (7th Cir. 2022).  The Seventh Circuit ruled that § 213(b)(12) is an affirmative defense, and Luna Vanegas’ complaint did not contain enough facts about the agricultural nature of the work to warrant dismissal.  Signet then filed a petition for writ of certiorari and asked the U.S. Supreme Court to decide the issue, which the Supreme Court declined to do.  Signet Builders, Inc. v. Luna Vanegas, 144 S. Ct. 71 (2023).

With the case back at the district court, Luna Vanegas filed a motion for conditional certification, a common strategic tactic in FLSA collective actions, and sought to send notice of the lawsuit to a nationwide group of Signet’s employees.  Luna Vanegas v. Signet Builders, Inc., No. 21-CV-00054, 2023 WL 5663259, at *1 (W.D. Wis. Sept. 1, 2023).  Even though Signet was incorporated and headquartered in Texas, the district court held that it was fair for this notice to go out to employees across the nation, because otherwise the ruling would have “the practical effect of forcing plaintiffs to file any multi-state FLSA collective action in the defendant employer’s home forum.”  Id. at *3.  Signet then filed a motion for interlocutory appeal, bringing the case back to the Seventh Circuit for a second time.  Id. at *4.  The district court granted that request.

The Seventh Circuit’s Opinion

On appeal, the Seventh Circuit reversed the district court for the second time, but this time on personal jurisdiction grounds.

The Seventh Circuit explained that generally a plaintiff can only sue a corporate defendant in three places.  First, a corporation can be sued in its state of incorporation.  Second, a corporation can be sued in the state where its headquarters is located.  And third, a corporation can be sued in any state where the issues connected with that particular case occurred.  In this case, it was undisputed that Signet was incorporated and headquartered in Texas.  It was also undisputed that only Luna Vanegas’ claims (and not the claims of other employees) arose out of Signet’s conduct in Wisconsin.  Therefore, the question was whether Signet’s conduct in Wisconsin was sufficient to justify a nationwide case.  The Seventh Circuit held that it was not.

Relying heavily on a recent U.S. Supreme Court decision in Bristol-Myers Squibb Co. v. Superior Ct. of California, San Francisco Cnty., 582 U.S. 255 (2017), the Seventh Circuit held that Signet must be subject to personal jurisdiction in Wisconsin — for each and every one of the would-be opt-in plaintiffs’ claims — for the case to go forward on a nationwide basis.  This rule differs from the standard in Rule 23 class actions because there, a representative plaintiff can maintain a lawsuit in a foreign jurisdiction as long as the court has jurisdiction over the named plaintiff.

The Seventh Circuit, however, reasoned that because a collective action plaintiff is not a party until they “opt in” to the litigation, FLSA collective actions are truly just “agglomerations of individual claims,” as opposed to one singular lawsuit.  Luna Vanegas, 2024 WL 3841024, at *4.  Further, unlike Rule 23 class actions, each party is entitled to proceed individually and “the statute of limitations on opt-in plaintiffs’ claims enjoys tolling only after the plaintiff files her consent, which goes to show the focus on a plaintiff’s own management of her claim.”  Id.  Consequently, the Seventh Circuit set a different standard to find personal jurisdiction in FLSA collective actions than the standard for Rule 23 class actions.

Additionally, the Seventh Circuit dispensed with a highly technical argument regarding Federal Rules of Civil Procedure 4 and 5 — holding that it did not save Luna Vanegas’ nationwide lawsuit.  Luna Vanegas argued that once personal jurisdiction was established over his claims against Signet in Wisconsin, and service was validly executed pursuant to Rule 4, then he was free to add parties via service under Rule 5.  However, the Seventh Circuit succinctly and unequivocally rejected that argument and held: “That is not how it works.”  Id. at *7 (emphasis added).  The Seventh Circuit explained that the Rule 5 workaround only applies if the court already has personal jurisdiction over the defendant as to the opt-in plaintiffs’ claims.  Otherwise, a new summons needs to be brought in a venue where the opt-in plaintiff can establish personal jurisdiction over the company.

Implications For Employers

Although a positive development for employers, this opinion is not a “nail in the coffin” for nationwide FLSA collective actions.  Indeed, the Seventh Circuit explicitly noted that “[a] nationwide collective of Signet’s workers could proceed in Texas, which enjoys general jurisdiction over Signet, with no loss of efficiency.”  Id. at *9.  Rather, this opinion simply states that if an employee is going to sue their employer for millions of dollars of potential liability and while asserting a nationwide collective action, they must do so in their employers’ home forum.

Corporate counsel, however, should not expect the fight to stop here.  The Seventh Circuit’s opinion is consistent with recent holdings by the Courts of Appeal in the Third, Sixth, and Eight Circuits, each imposing the same personal jurisdiction requirement.  Canaday v. Anthem Cos., 9 F.4th 392 (6th Cir. 2021); Fischer v. Fed. Express Corp., 42 F.4th 366 (3d Cir. 2022); Vallone v. CJS Sols. Grp., LLC, 9 F.4th 861 (8th Cir. 2021).  The issue is not entirely settled, however, as the First Circuit reached the opposite conclusion.  Waters v. Day & Zimmermann NPS, Inc., 23 F.4th 84, 94 (1st Cir. 2022).  Accordingly, the pending circuit split signals that this issue is ripe for consideration by the U.S. Supreme Court.

Posted on by Class Action Defense

The Class Action Weekly Wire – Episode 69: Litigation Trends & Legislative Reform Under California’s PAGA


Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Sarah Gilbert with their discussion of key developments in litigation and legislation related to the California Private Attorneys General Act.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jerry Maatman: Thanks, loyal blog listeners and readers for joining us on this week’s installment of the Class Action Weekly Wire. I’m Jerry Maatman, a partner at Duane Morris, and I’m joined by my colleague, Sarah Gilbert, of our San Diego office. Welcome, Sarah.

Sarah Gilbert: Great to be here, Jerry. Thank you.

Jerry: Today we wanted to discuss trends and important developments in state court class action, litigation. Since the decision of where to file a class action is always a strategic imperative for the plaintiff’s bar, and then, whether or not to remove it from state court to federal court. For defense counsel, class action litigation is very much like buying real estate – location, location is everything, Sarah, what are some of the considerations that you’re often speaking to your clients about in terms of state court versus federal court class action litigation.

Sarah: So, although almost all state law procedural requirements for class certification mirror Rule 23 of the federal rules. The plaintiffs’ bar often perceives state courts as having more positive predisposition towards their clients’ interests, particularly where putative class members have connections to the state and the events at issue occurred in the state where the action is filed. Beyond forum shopping between state and federal court, the plaintiffs’ bar also seeks out individual states that are believed to be more plaintiff-friendly, such as California, Georgia, Florida, Illinois, Louisiana, Massachusetts – among others – and these are actually among the leading states where plaintiffs’ lawyers file a volume of class actions. These courts are thought to have more relaxed procedural rules related to discovery, consolidation, and class certification; a lower bar for evidentiary standards; and higher than average jury awards – among other considerations – all of which incentivize forum shopping related to state class actions.

Jerry: I’ve been a lawyer 42 years, and I think at last, count, I’ve been in 48 different states defending class action litigation. And I’d have to say that although state statutory rules and regimes are based loosely on Federal Rule 23, every state approaches class action litigation a little differently, and there are nuances to the law. What do you think is important, for example, for companies operating in California to know about the nuances of California class action litigation?

Sarah: Absolutely. So, it is very important for companies in California to pay attention to California’s controversial Private Attorneys General Act – we call it the PAGA. The PAGA authorizes workers to file lawsuits, to recover civil penalties on behalf of themselves, other employees and the State of California, for state labor code violations. As of now, California is the only state to have enacted this type of law so far. However, several other states are considering their own similar private attorneys general laws, including New York, Washington, Oregon, New Jersey, and Connecticut. So it will be crucial to monitor state legislation on this topic given the impact such laws will have on class litigation strategy moving forward.

Jerry: Well, I know this has been an especially interesting year for PAGA related developments, especially following the reform legislation signed by Governor Newsom in June. And, as I understand it, after June of 2024, there’ll be a new regime in terms of how PAGA damages, PAGA procedures will take place. And although not to be applied retroactively and only into the future, it’s going to be a brand-new playing field in California. I know you’ve been working very hard on strategies for clients to deal with these changes, what would be some of the high-level points or takeaways that you think are important for clients?

Sarah: Sure. So I mean, as is clear and as you referenced, the PAGA reforms and activity are hotly contested, hotly debated in California. California is the epicenter of class actions filed in state court. It has more class action litigation than any other state. While all varieties of class-wide cases are filed in California, a high majority of those are consumer fraud and employment-related. And something I know, with all of our clients in California facing such claims, is that even where an employer’s written formal policies appear facially neutral and compliant – which is very often the case – employees may successfully seek class certification for demonstrating common issues where an employer’s practices and protocols allegedly violate the law, even if those policies, as written, appear to be compliant.

Jerry: Thanks, Sarah. You know, I think it’s very interesting – most companies think that the California Supreme Court exists to find in favor of plaintiffs. Yet in the last month it issued the Lyft decision, which has a direct ‘apples and oranges’ practical effect on PAGA litigation. As I read the opinion, it says, where an employer is facing multiple PAGA actions and settles one of them, the litigants in the other pending PAGA actions cannot parachute in, intervene and challenge the other settlement. So it makes it easier for a company to deal with PAGA litigation and to settle litigation. What are some of your thoughts on the takeaways from the California Supreme Court decision in Lyft?

Sarah: Yeah, absolutely. This was a seminal ruling came out on August 1st of this year. To give some background, in rapid succession between May to July 2018, three plaintiffs, all Lyft drivers, Olson, Seifu, and Turrieta filed separate PAGA actions alleging improper classification as independent contractors. So in 2019, Turrieta reached a $15 million settlement with Lyft, which included a payment of $5 million in attorneys’ fees. As part of the settlement, Turrieta amended her complaint to allege all PAGA claims that could have been brought against Lyft. She then filed a motion for court approval of the settlement consistent with practice. And although the LWDA did not object to the settlement, when Olson and Seifu, the other two plaintiffs, and their counsel, got wind of the settlement, they moved to intervene, and objected. The trial court denied the intervention requests, approved the settlement, and then denied motions by Olson and Seifu to vacate the judgment in the Turrieta PAGA action. The court of appeal affirmed, finding that as nonparties, Olson and Seifu lacked standing to move to vacate the judgment, as only an aggrieved party can appeal from a judgment. On the intervention issue, the Court of appeal explained that the real party interest in a PAGA action is the State of California, and thus neither Olson nor Seifu had a direct interest in the case.

The California Supreme Court then granted review to consider whether a PAGA plaintiff has the right to intervene, object to, or move to vacate a judgment in a related pocket action that purports to settle the PAGA claims that a plaintiff has brought on behalf of the State. The California Supreme Court ended up agreeing with the court of appeal and the trial court, and they made a few notable findings. The California Supreme Court noted there was nothing in the PAGA statute expressly permitting intervention, and that PAGA’s purpose to penalize employers who violate California wage & hour laws and deter such violations was well served by the settling PAGA plaintiff, thus having other PAGA plaintiffs involved in a settled PAGA claim is not necessary to effectuate PAGA’s purpose. Relatedly, the Supreme Court also found significant the fact that the PAGA statute only requires that notice of settlement be sent to the LWDA and approved by the trial court, necessarily implying that other litigants need not be informed of the settlement or otherwise involved.

The Supreme Court also noted that permitting intervention would result in a PAGA claim involving multiple sets of lawyers, all purporting to advocate for the same client, fighting over who could control the litigation and settlement process, and who could recover the attorneys, fees. The Supreme Court highlighted that PAGA plaintiffs nonetheless have a variety of options to pursue other than intervention, such as consolidation or coordination of PAGA cases, to facilitate resolution of the claims in a single proceeding; or PAGA plaintiff can offer arguments and evidence to a trial court related to the PAGA settlement; or raise his or her concerns with the LWDA, so as to spur LWDA action.

Finally, the Supreme Court then held that the same reasoning for its conclusion against a right to intervention also meant that a PAGA plaintiff has no right to move to vacate the judgment obtained by another PAGA plaintiff in a separate PAGA action, or to require that any objections he or she files to another plaintiff settlement be ruled upon.

Jerry: Thanks for that excellent overview, Sarah. I think 2024 and 2025 are going to be bellwether years in California, not only for PAGA related rulings, especially as the reform legislation is implemented, but just class action litigation in general. As our loyal blog readers and listeners know, we do an annual study called the Duane Morris Class Action Review. We download every filing, every ruling in state and federal courts throughout the United States. This morning there were 118 class actions recorded as being filed yesterday, and 40% of them were in the state of California. So California is truly the epicenter of class action litigation. Well, thanks so much for joining us on this weekly episode, Sarah, and thanks so much for your thought leadership in this space.

Sarah: Thank you. Thank you, Jerry.

Posted on by Class Action Defense

Illinois Governor J.B. Pritzker Signs New Artificial Intelligence Law Focused On Employment Practices

By Tiffany E. Alberty, Alex W. Karasik, Gerald L. Maatman, Jr., and Brandon Spurlock

Duane Morris Takeaways: On August 9, 2024, Illinois Governor J.B. Pritzker signed House Bill 3773, which amends the Illinois Human Rights Act to address an employer’s use of artificial intelligence in employment-related decisions such as recruitment, hiring, promotion, retention, and discipline if it subjects an employee to discrimination.  The new law gives the Illinois Department of Human Rights (IDHR) the power to adopt any rules necessary for the implementation and enforcement of the statute, including determining rules on whether notice will be required and the timing and methods of such notice. The amendment will take effect January 1, 2026.

For employers with operations in Illinois who embrace the use of this cutting-edge technology, this new law is the latest compliance piece on a constantly evolving employment law checklist.

Background Of Amendment

The Illinois House introduced H.B. 3773 in February 2023 by legislative members looking to implement safeguards where artificial intelligence systems are used in employment-related decisions.  The bill received nearly unanimous support, passing the House 106-0, and the Senate 57-0.  The bill reached the governor’s desk in June 2024 and was signed before summer’s end.  The bill comes on the heels of Colorado’s sweeping AI legislation enacted in May 2024 covering not only employment related decisions, but also education, financial lending, government services, healthcare services, housing and insurance.  Illinois is now one of the 34 states that has either enacted or proposed legislation related to artificial intelligence.  Illinois lawmakers assert that the new law is a proactive step toward preventing the unintended consequences of using AI-technology in hiring.

Legislative Revisions

In essence, the new law prohibits an employer from using artificial intelligence if it has a discriminatory effect on employees based on a protected class or uses zip codes as a proxy for a protected class, and requires employers to give notice if the employer is using artificial intelligence for the following employment related purposes:

    • Recruitment
    • Hiring
    • Promotion
    • Renewal of employment
    • Selection for training or apprenticeship
    • Discharge
    • Discipline
    • Tenure (or the terms, privileges, or conditions of employment)

See 775 ILCS 5/2-102(L)(1).

In enacting the new law, Illinois legislatures braved the murky waters of attempting to define artificial intelligence, which has proven difficult for other state legislatures that tackled this challenge, resulting in a patchwork of definitions. (See, e.g., Connecticut S.B. 1103, Louisiana S.C.R. 49, Rhode Island H 6423, Texas H.B. 2060.)

Here, the amendment defines Artificial Intelligence as:

a machine-based system that, for explicit or implicit objectives, infers, from the input it receives, how to generate outputs such as predictions, content, recommendations, or decisions that can influence physical or virtual environments. . . [and] includes generative artificial intelligence.

See 775 ILCS 5/2-101(M).

It remains to be seen whether the Illinois definition will prove adequate or cause uncertainty and confusion.  Importantly, the new law empowers the IDHR to “adopt any rules necessary for the implementation and enforcement of this subdivision, including, but not limited to, rules on the circumstances and conditions that require notice, the time period for providing notice, and the means for providing notice.”  When the law goes into effect at the start of 2026, it will be important to monitor what rules and guidance the IDHR offers regarding implementation and enforcement.

Impact Of H.B. 3733 And Other Current And Proposed AI-Laws

As more employers incorporate artificial intelligence into their employment-related activities, it will be important to balance the benefits of using AI with the risk of running afoul of the ever evolving legal landscape, because not only is H.B. 3773 sweeping in scope, in that it impacts recruitment, hiring, promotion, retention, discipline, termination, benefits, etc., but it is also nebulous because it is not clear what it means to “ha[ve] the effect of subjecting employees to discrimination.”

Like other states across the country, Illinois lawmakers are leaning into implementing proactive measures to regulate artificial intelligence related to employment decisions despite the fact that the technology is still so new and adoption is in its early stages.  The challenge for Illinois employers will be staying abreast of how these new laws and how they are interpreted and enforced.

H.B. 3773 is not the first artificial intelligence law applicable to Illinois employers. In January 2020, the Illinois Artificial Intelligence Video Interview Act went into effect, which applies to all employers that use an AI tool to analyze video interviews of applicants for positions based in Illinois. The law requires employers to notify applicants before the interview that AI may be used to analyze their video interview and obtain the applicant’s consent.

In addition to these two relatively recent AI-based laws, in February 2024, the Illinois House sent H.B. 5116 to the State Senate, which is a proposed law that would require any “deployer” of an automated decision tool to perform an impact assessment and provide that assessment to the IDHR. The deployer also will have to notify a person who is subject to a “consequential decision” that an automated decision tool is being used to make, which could be in the context of employment, education, housing, healthcare, financial services, among other decision making categories.

Implication For Employers

As AI adoption continues to expand within workplace operations, although H.B. 3773 does not take effect until January 2026, Illinois businesses would be wise to begin assessing whether their AI-systems are at risk of running afoul of the statute.  Illinois employers currently using AI technology that may fall under the statute will want to work with counsel and experienced vendors to assess their systems for evidence of bias and/or discrimination.  As mentioned, it also will be important for Illinois employers to monitor any directives issued by the IDHR regarding the new law, in particular with respect to any rules around notice and/or consent.

Posted on by Class Action Defense

The Class Action Weekly Wire – Episode 68: Settlement Issues In Class Action Litigation


Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Nick Baltaxe with their discussion of the settlement process in class action litigation and common issues that arise for both plaintiffs and defendants while crafting settlement agreements.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jennifer Riley: Thank you for being here again for our next episode of the weekly podcast the Class Action Weekly Wire. I’m Jennifer Riley, partner at Duane Morris, and joining me today is associate Nick Baltaxe. Thank you for being on the podcast, Nick.

Nick Baltaxe: Always a pleasure, Jen, happy to be here.

Jennifer: Today we’re discussing settlement issues in class action litigation over the past 12 months. Nick, how often are there settlements in class action litigation?

Nick: You know, class actions are typically not tried to verdict. Trials in these situations are rare, because financial exposure in most of these cases can be vast, and the possibility of an adverse verdict is usually an unacceptable risk to the employer. Because of that, most potential class actions are resolved either before or on the heels of a class certification order. Rule 23 not only provides a process for that certification of the class action, but also does provide a procedure for settlement of the class action claims as well. Specifically, Rule 23(e) lays out a three-part settlement approval process. It includes preliminary approval, then notice to the class, and final settlement approval.

Jennifer: And what would you say are some of the benefits of settling these types of cases?

Nick: You know there are benefits to everyone included. Early settlements offer plaintiffs relatively quick payments, and they get to kind of skirt around the longer, drawn out class certification and class litigation process. It’s a benefit to the defendant because it allows the defendants to end cases early, which usually avoids the costs of protracted litigation, and usually what is very expensive discovery. Also, there’s a benefit to the court system as they get to avoid needless litigation that clogs court dockets. Usually, when permitted, parties frequently choose to settle on a confidential basis, which also allows the avoidance of risk of adverse publicity which is a dynamic that can benefit both defendants and plaintiffs.

Jennifer: Are there any obstacles to settling or getting court approval of class wide settlements? Or what would you say some of the biggest obstacles are?

Nick: Yes. So, as we stated, there’s both a preliminary and a final approval process for these class settlements. In order to secure a court’s approval at the preliminary stage, the parties must provide sufficient information to the court to determine whether or not it will likely be able to approve the settlement and certify the classes solely for the purposes of the entry of judgment. Rule 23(e) includes a detailed list of factors for consideration before final approval, as well, including the quality of class representation. Whether the negotiation took place at an arm’s length, the adequacy of class relief, and the equitable treatment of the class members. Class notice at the preliminary approval stage is also governed by this rule and outlines the proper process for providing notice to the class members.

Jennifer: Thanks, Nick. The settlement approval process is far from a rubber-stamping process, at least in many courts. While the legal standards are rule-based, courts tend to apply the standards in less than identical fashion based on the case law of the federal circuit which within which they’re located, as well as based on their own discretion. So what might pass muster in one courtroom may not pass muster in another courtroom. Courts do tend to use a less rigorous standard for certification of a class for settlement purposes, though, as compared to non-settlement purposes. I think this is especially evident with the Rule 23(b)(3) requirement of predominance. What do you think this means for counsel crafting these settlements?

Nick: Yes, settlement on a class wide basis consistently poses strategic dilemmas both for plaintiffs and defendants alike. There are multiple issues that need to be considered recrafting the settlement. For example, how much can a defendant concede without compromising its ability to defend the case to the extent the settlement ends up falling through or is not approved; can we settle something on a class wide basis that may be too cheap, and therefore deemed to be inadequate or unfair when being reviewed by the courts; and finally, how extensive and broad can the release language be to cover the settlement parties without risking of that not being approved by the court.

Jennifer: And the courts can answer those questions on a very wide spectrum. So, now that we’ve laid out the settlement process, do you have any notable rulings that you wanted to discuss from the past 12 months?

Nick: So classified settlements require that plaintiffs show all the applicable requirements of Rule 23, and courts have, and will, deny approval to a proposed class-wide settlement if those requirements are not established. A good example is a case called Mercado, et al. v. Metropolitan Transportation Authority. In that case, the plaintiffs, who are a group of employees of the MTA, filed a collective action alleging that the defendant failed to pay overtime compensation in violation of the FLSA.

The parties ultimately settled the claims, and the plaintiffs filed a motion for preliminary settlement approval. However, the court denied the motion. While the parties had asserted that the litigation would have been protracted, expensive, and risky – and that the settlement provided close to maximum recovery for plaintiffs – the court found that the parties failed to provide any documentation to support their assertions concerning the ranges of possible recovery and the reasonableness of the settlement. The court also noted that the settlement agreement’s release was overly broad because it extended liability releases to various entities beyond the defendant as well as to individuals who are not part of the lawsuit. The court also examined attorneys’ fees and costs. In the case, the plaintiffs’ counsel sought a fee of one-third of the settlement proceeds and reimbursement of all costs. The court opined that the requested rates were reasonable, but the plaintiffs’ counsel failed to provide any evidence whatsoever to determine whether the costs were also reasonable. The court finally concluded the plaintiffs failed to address whether the conditional certification status of the collective action affected the settlement; whether they were requested service rewards for the named plaintiffs; and that the fees and the cost of the administration of the settlement fund were reasonable. Accordingly, the court denied the motion for preliminary settlement approval.

Jennifer: Nick, how often would you say that there are objections to class action settlements?

Nick: So there is also a process for class members to object to the settlement, and there are objections all the time in these situations to these settlements. Sometimes these objectors are even successful in overturning the settlement or getting it vacated on appeal. An interesting example from the past 12 months is a case called In Re Wawa, Inc. Data Security Litigation. In that case, the plaintiffs allege that their personal information was compromised following a data breach in which hackers gained unauthorized access to Wawa’s payment systems, therefore, compromising the credit and bank card data of around 22 million customers.

The case was ultimately settled for $9 million in gift cards and other compensation to customers, including $3.2 million for attorneys’ fees and costs. One of the class members, named Theodore H. Frank, objected to the settlement, arguing that the fee calculation was unreasonable, and arguing that the settlement was based on a constructive common fund that combined attorney and class recovery, therefore, making the fee award disproportionate to the amount that was being provided to the class members. The objector also raised concerns about side arguments between class counsel and Wawa.

The district court, however, approved the settlement and dismissed the objections. However, Frank appealed, and the Third Circuit vacated the district court’s ruling. The Third Circuit in doing so highlighted two key considerations in evaluating fee rewards: first, the relationship between the fee award and the benefit received by the class members; and second, any side agreements between class counsel and the defendant. The Third Circuit ruled that the district court on remand had to review the fee award with “fresh guidance” from the appellate level, particularly regarding arrangements between the parties prior to any settlement approval being granted. The Third Circuit also noted the parties’ “clear sailing” arrangement, under which Wawa agreed not to contest any fee petitions filed by class counsel for the consumers, and the fee reversion provision that any reductions in class counsel fees would be returned to Wawa rather than distributed to the class members. The Third Circuit made sure that both of those were being reviewed to determine whether or not they were fair and reasonable. The Third Circuit further opined the district court should consider whether the funds made available to the class members, rather than the amount claimed during the claims process, was the best measure of reasonableness, and whether the fee reward was reasonable in light of any other side agreements between class counsel and Wawa. With all those considerations in mind, the Third Circuit accepted the objection and vacated and remanded it to the district court.

Jennifer: Thanks, Nick. Very, very interesting, and a great example of an appellate court articulating the fairness considerations that should be applied by district courts in considering approval of class action settlements.

Well, I think we are about out of time here for today. So thanks so much for joining me, Nick, and thanks to our listeners for being here. We will be sure to give more updates on settlement issues in class action litigation on our blog, the Duane Morris Class Action Defense Blog, so stay tuned.

Nick: Thanks, all.

 

Posted on by Class Action Defense

Illinois Corrects The BIPA’s “Cataclysmic, Jobs-Killing Damages” Regime In New Reform Legislation

By Gerald L. Maatman, Jr., Ryan T. Garippo, and George J. Schaller

Duane Morris Takeaways:  On August 2, 2024, Illinois Governor J.B. Pritzker signed Senate Bill 2979, which amends the draconian penalties under Sections 15(b) and 15(d) of the Illinois Biometric Information Privacy Act (the “BIPA”).  Senate Bill 2979 and its reformed language can be accessed here.  For Companies caught in the BIPA’s crosshairs, this reform ushers in a welcome reprieve to the former statute’s harsh regime of penalties.

Background On The BIPA’s Former Construction

The BIPA statute codifies restrictions against companies that collect biometric information and identifiers.  See 740 ILCS 14/1.  The rationale for this legislation was that “[b]iometrics are unlike other unique identifiers that are used to access finances or other sensitive information” and as such, “[t]he full ramifications of biometric technology are not fully known.”  Id. § 14/5(c)-(f).  Consequently, the BIPA prohibited companies from “collect[ing], captur[ing], purchas[ing], receiv[ing]” or “disclos[ing], redisclos[ing], or otherwise disseminat[ing]” an individual’s biometric data.  Id. § 14/15(b)-(d).  The BIPA further imposed statutory damages in the amount of $1,000 for each negligent violation of the statute, and $5,000 for each intentional violation.  Id. § 14/20.

As a result, what constituted a single “violation” of the BIPA had significant consequences for companies.  If violations occurred on a “per person” basis, the highest amount of damages that a company could owe an individual was $1,000 or $5,000 respectively.  However, if violations occurred on a “per scan” or “per incident” basis, companies would owe damages for each time that they collected or disseminated that data.  Under the latter, companies could be required to sometimes pay “class-wide damages [that] . . . exceed $17 billion” dollars.  Cothron v. White Castle System, Inc., 2023 IL 128004, ¶ 76 (Feb 17, 2023) (Overstreet, J., dissenting).  Despite the legislature’s concerns with collecting biometric information, many companies argued that this outcome cannot be what the Illinois General Assembly intended.

Regardless, on February 17, 2023, the Illinois Supreme Court issued a landmark decision on this statutory question.  The Supreme Court held that “the plain language of section 15(b) and 15(d) demonstrates that such violations occur with every scan or transmission.”  Id. at ¶ 31.  However, the opinion was not unanimous.  Justice Overstreet objected to this interpretation of the statute and criticized the majority for adopting an interpretation that caused “Illinois businesses to be subject to cataclysmic, jobs-killing damages, potentially up to billions of dollars, for violations of the Act.”  Id. at ¶ 73 (Overstreet, J., dissenting).  But Justice Overstreets’ dissents were only dissents, and his interpretation of the law was not adopted.

Legislative Revisions To The BIPA Under SB 2979

On August 2, 2024, and over a year later, Governor Pritzker and the Illinois General Assembly vindicated Justice Overstreet’s dissents. They explained that “it does not withstand reason to believe the legislature intended this absurd result.”  Id.  SB 2979 makes two major corrections to the BIPA’s draconian reach.  First, the reform removes “per scan” violations from the statute.  Now, damages under Sections 15(b) and 15(d) of the BIPA accrue on a “per person” basis.  Specifically, the statute now states:

(b) For purposes of subsection (b) of Section 15, a private entity that, in more than one instance, collects, captures, purchases, receives through trade, or otherwise obtains the same biometric identifier or biometric information from the same person using the same method of collection in violation of subsection (b) of Section 15 has committed a single violation of subsection (b) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section.

(c) For purposes of subsection (d) of Section 15, a private entity that, in more than one instance, discloses, rediscloses, or otherwise disseminates the same biometric identifier or biometric information from the same person to the same recipient using the same method of collection in violation of subsection (d) of Section 15 has committed a single violation of subsection (d) of Section 15 for which the aggrieved person is entitled to, at most, one recovery under this Section regardless of the number of times the private entity disclosed, redisclosed, or otherwise disseminated the same biometric identifier or biometric information of the same person to the same recipient.

740 ILCS 14/20 (b)-(c) (emphasis added).

Second, the statute now also allows for companies to obtain a “electronic signature” in order to secure a release from BIPA liability.  740 ILCS 14/10.

Impact Of SB 2979 On Class Action Litigation Under The BIPA

The importance of this reform cannot be understated.  For example, before SB 2979, at a company like the one in Cothron, where each employee “scans his finger (or hand, face, retina, etc.) on a timeclock four times per day — once at the beginning and end of each day and again to clock in and clock out for one meal break — over the course of a year,” that company would have collected a single employee’s “biometric identifiers or information more than 1000 times.”  Cothron, 2023 IL 128004, ¶ 78 (Overstreet, J., dissenting).  Over the course of five years, that same employee may have scanned over 5,000 times.  Tims v. Black Horse Carriers, Inc., 2023 IL 127801, ¶ 32 (Feb. 2, 2023) (holding 5-year statute of limitations applies for violations of the BIPA).

Under those circumstances, at a rate of $1,000 per violation, a company may owe $5,000,000 to that employee alone.  And, at a rate of $5,000 per violation, a company may owe $25,000,000 to that employee.  After SB 2979’s passing, this exact same company would only owe $1,000 or $5,000 to each employee respectively.  A such, this reform ushers in a new era of damages limits surrounding BIPA litigation, and peace of mind to corporate counsel charged with defending their companies from such massive liability.

Implications for Employers

As to companies currently engaged in BIPA litigation, there is reason to believe that such legislation may not be viewed as retroactive.  However, even if this legislation is not retroactive, damages under the BIPA are discretionary and are not required to be imposed.  See, e.g., Rogers v. BNSF Railway Company, 680 F. Supp. 3d 1027, 1041-42 (N.D. Ill. 2023).  Companies can expect the retroactive-effect of SB 2979, or lack thereof, to be the next battleground for BIPA litigation.

Consequently, SB 2979 now places companies in the best position possible to avoid “this job-destroying liability” until the remaining BIPA cases work themselves through the judicial system.  Cothron, 2023 IL 128004, ¶ 86 (Overstreet, J., dissenting).  As those cases progress, companies should revisit to ensure continued compliance with the BIPA and monitor SB 2979’s impact in on-going BIPA cases.

Posted on by Class Action Defense

Eighth Circuit Overturns “Windfall” $78.75 Million Attorney Fee Award In T-Mobile Data Breach Class Action

By Gerald L. Maatman, Jr., Jennifer A. Riley, and Emilee N. Crowther

Duane Morris Takeaways: In a data breach class action entitled In Re T-Mobile Customer Data Security Breach Litigation, Nos. 23-2944 & 23-2798, 2024 WL 3561874 (8th Cir. July 29, 2024), the U.S. Court of Appeals for the Eighth Circuit  overturned a district court’s order granting $78.75 million in attorneys’ fees for class counsel as part of the underlying approval of the class action settlement. The Eighth Circuit held that the district court abused its discretion by awarding class counsel an unreasonable attorneys’ fee award, and improperly striking a class member objection to that award.

This decision serves as an important reminder that, in class actions, unnamed class members who cannot opt out of a class can object to and appeal a district court’s approval of a settlement — which can inure to the benefit of both the class and the defendant.

Case Background

At some point before August 16, 2021, a cybercriminal breached T-Mobile’s systems, capturing personally identifiable information for an estimated 76.6 million people. Id. Various plaintiffs filed suits nationwide, and in December 2021, the suits were combined into a multidistrict litigation proceeding in the U.S. District Court for the Western District of Missouri. Id.

In January 2022, the Court appointed twelve attorneys to represent the class in various roles (“class counsel”), who then filed a joint complaint, and entered settlement discussions with T-Mobile. Id. at 7. A month after class counsel filed the complaint, the parties agreed to a settlement where T-Mobile would, among other items, create a $350 million fund from which individual class members could recover up to $25,000 for out-of-pocket losses they could prove resulted from the data breach, and $25 (or $100 if a member of the California sub-class) for all other class members who did not submit proof of loss. Id.

After the class was notified of the settlement, class counsel moved for a fee award of 22.5% of the $350 million settlement fund, or a total award of $78.75 million. Id. at 8. Thirteen class members filed objections to the settlement. Two of the objecting class members, Cassie Hampe (“Hampe”) and Connie Pentz (“Pentz”), contended that the amount of attorneys’ fees sought was too high. Id. The district court struck Hampe’s objection under Rule 12(f), finding that Hampe and her law firm were serial objectors, and that her objection was vexatious, brought in bad faith, and brought for the sole purpose of extracting a fee from the settlement fund. Id. at 9. The district court also struck Pentz’s objection under Rule 12(f) because Pentz’ son had previously filed frivolous objections to class action settlements and Pentz herself would not attend a deposition. Id.

Hampe and Pentz appealed. They argued that the district court erred in relying on Rule 12(f) to strike their objections, and that the class counsel’s fee award was unreasonable. Id.

The Eighth Circuit’s Decision

The Eighth Circuit found that the district court abused its discretion in striking Hampe’s objections to class counsel’s attorney’s fees request, and also by awarding class counsel unreasonable attorneys’ fees. Id. at 19. The Eighth Circuit also held that the district court did not abuse its discretion by striking Pentz’ objections. Id.

First, the Eighth Circuit found that the district court abused its discretion by relying on Rule 12(f) to strike the objections of both Hampe and Pentz. Id. at 10. While Rule 12(f) permits courts to “strike from a pleading . . . any redundant, immaterial, impertinent, or scandalous matter,” the Eighth Circuit reasoned that it did not permit the district court to strike a class member’s objection to a settlement, since it is not a pleading under Rule 7(a). Id. at 9-10.

Second, the Eighth Circuit acknowledged that while the district court had inherent authority to strike objections as a sanction for misconduct, the alleged misconduct asserted here only supported the district court striking Pentz’ objection — not Hampe’s objection. Id. at 10. For Hampe, the Eighth Circuit found that the district court abused its discretion in striking her objection because there was no evidence that either Hampe or her attorneys were attempting to extort a payout, acted vexatiously, broke any rules, or acted unethically. Id. As for Pentz, however, the Eighth Circuit held that it could not fault the district court for striking her objection, since Pentz had been covertly working with an attorney (despite initially stating that she was acting pro se), evaded service of a subpoena compelling her to sit for a deposition, and generally refused to cooperate with the district court’s discovery orders. Id. at 11.

Finally, the Eighth Circuit analyzed Hampe’s objection that the fee award was unreasonable. Id. at 12-19. In class actions, courts use two methods to calculate attorneys’ fees, including: (i) the “lodestar” method (where the court multiplies the number of hours the attorneys worked by their hourly rates); or (2) the percentage method (where the court awards a percentage of the fund that the attorneys helped recover). Id. at 12. While district courts have discretion to choose which method should apply, the Eighth Circuit underscored that district courts should focus on whether or not the fee is reasonable under Rule 23(h), and consider “the time and labor required,” “the amount involved and the results obtained,” and “awards in similar cases.” Id. at 12.

The Eighth Circuit ultimately held that the district court’s attorneys’ fee award was unreasonable and constituted a “windfall” for class counsel. Id. at 16. The district court, in an attempt to demonstrate that the attorneys’ fee award was reasonable, conducted a lodestar crosscheck and found that the lodestar “multiplier” was 9.6, meaning that class counsel would get paid about 9.6 times their customary hourly rates. Id. While district court found this multiplier was reasonable, the Eighth Circuit did not, citing its previous holding in Rawa v. Monsanto Co., 934 F.3d 862, 870 (8th Cir. 2019) (holding that a 5.3 multiplier was too high and amounted to a windfall for class counsel). Id.

Implications For Class Action Defendants

The Eighth Circuit’s ruling in In Re T-Mobile Customer Data Security Breach Litigation serves as an important reminder that class members have power to object to attorney fee awards. While only awarding reasonable attorneys’ fees to class counsel certainly inures to the benefit of the class, it also benefits the defendants in claims-made data breach settlements. When calculating the total “payout” for a defendant in a claims-made data breach settlement, an attorneys’ fee award is a hard cost that drives up a defendant’s total likely payout. However, reducing the attorneys’ fee, it leaves more in the settlement fund for class members to claim. As stated in the 2024 Duane Morris Class Action Review, claim rates in data breach class actions are between 1% and 10%. Accordingly, by raising the amount left in the settlement fund for the class members to claim, the total payout for a defendant will likely substantially decrease.

Posted on by Class Action Defense

California Supreme Court Rules That Employers Facing Multiple Overlapping PAGA Lawsuits Can Settle With One PAGA Plaintiff Without Intervention By Another PAGA Plaintiff

By Eden E. Anderson, Gerald L. Maatman, Jr., and Shireen Wetmore

Duane Morris Takeaways: The California Supreme Court issued its opinion in Turrieta, et al. v. Lyft, Inc., Case No. S271721 on August 1, 2024. It held that, when an employer is facing multiple overlapping PAGA actions and settles one such action, the plaintiffs in the other PAGA actions are not permitted to intervene in the settled action, to require a trial court to receive and to consider their objections to the settlement, or to seek to vacate the ensuing judgment.  The Turrieta decision has significant ramifications for employers facing a multiplicity of PAGA actions and ensures that an employer can settle one such action without substantial interference from other PAGA plaintiffs and their attorneys. 

Case Background

In rapid succession between May to July 2018, three Lyft drivers, Olson, Seifu, and Turrieta, each filed separate PAGA actions alleging improper classification as independent contractors.  In 2019, Turrieta reached a $15 million settlement with Lyft, which included a $5 million payment to her counsel.  As part of the settlement, Turrieta amended her complaint to allege all PAGA claims that could have been brought against Lyft.  She then filed a motion for court approval of the settlement.

The LWDA did not object to the settlement.  However, when Olson and Seifu and their counsel got wind of the settlement, they moved to intervene and objected.  The trial court denied the intervention requests, approved the settlement, and then denied motions by Olson and Seifu to vacate the judgment in the Turrieta PAGA action.

The Court of Appeal affirmed.  It held that, as non-parties, Olson and Seifu lacked standing to move to vacate the judgment as only an “aggrieved party” can appeal from a judgment.  On the intervention issue, the Court of Appeal explained that the real party in interest in a PAGA action is the State and thus neither Olson nor Seifu had a direct interest in the case.

The California Supreme Court then granted review to consider whether a PAGA plaintiff has the right to intervene, or object to, or move to vacate a judgment in a related PAGA action that purports to settle the claims that plaintiff has brought on behalf of the state.

The California Supreme Court’s Decision

The California Supreme Court agreed with the Court of Appeal and the trial court.  Justice Jenkins authored the decision, with Chief Justices Guerrero and Justices Corrigan, Kruger, and Groban concurring.

The California Supreme Court first addressed whether a PAGA plaintiff can intervene in another PAGA action that settles.  The Supreme Court noted there was nothing in the PAGA statute expressly permitting intervention, and that PAGA’s purpose — to penalize employers who violate California wage and hour laws and to deter such violations — was well served by the settling PAGA plaintiff.  Thus, having other PAGA plaintiffs involved in a settled PAGA claim is not necessary to effectuate PAGA’s purpose.  The Supreme Court also found significant the fact that the PAGA only requires that notice of settlement be provided to the LWDA and approved by the trial court, necessarily implying that other litigants need not be informed of the settlement or involved.

The Supreme Court also noted that permitting intervention would result in a PAGA claim involving multiple sets of lawyers all purporting to advocate for the same client and fighting over who could control the litigation and settlement process, and who could recover their attorneys’ fees.  Not only does the PAGA not itself address such complexities, but also such a messy situation would thwart the pursuit of PAGA claims, contrary to the statute’s purpose.

The Supreme Court highlighted that PAGA plaintiffs nonetheless have a variety of options to pursue other than intervention.  They remain free to seek consolidation or coordination of PAGA cases to facilitate resolution of the claims in a single proceeding.  Or a PAGA plaintiff can offer arguments and evidence to a trial court assessing a PAGA settlement, or can raise his/her concerns with the LWDA so as to spur LWDA action.

The Supreme Court then held that the same reasoning for its conclusion against a right to intervention also meant that a PAGA plaintiff has no right to move to vacate the judgment obtained by another PAGA plaintiff in a separate PAGA action, or to require that any objections he/she files to another plaintiff’s settlement be ruled upon.

In a concurring opinion, Justice Kruger emphasized that there is nothing preventing a private plaintiff (rather than a PAGA plaintiff) from intervening to protect their own personal interests as an allegedly aggrieved employee, and she emphasized the trial court’s duty to carefully examine PAGA settlements.

Justice Liu penned a lengthy dissent.  Seemingly mistrustful of trial courts’ ability to gauge the fairness of a PAGA settlement, Justice Liu expressed his view that the majority’s opinion creates a “substantial risk of auctioning settlement of PAGA claims to the lowest bidder and insulting those settlements from appellate review.” See Dissent at 2   Justice Liu encouraged the California Legislature to take action to amend the PAGA to expressly confer the rights the majority found lacking.

Implications For Employers

The Turrieta decision has significant ramifications for employers facing a multiplicity of PAGA actions.

By settling with one plaintiff who then amends the complaint to cover the claims at issue in the other PAGA actions, the employer can pull the rug out from underneath the other plaintiffs and their counsel.  As we reported last month, recent amendments to the PAGA now require that a PAGA plaintiff have suffered the same alleged injury as the other allegedly aggrieved employees he or she is, as the State’s proxy, representing.  That amendment diminishes the likelihood of employers continuing to face multiple overlapping PAGA claims.  But, to the extent an employer is facing a multiplicity of overlapping PAGA actions, the Turrieta decision makes clear that settlement of one such action can be accomplished without substantial interference from other PAGA plaintiffs.

 

Posted on by Class Action Defense

The Class Action Weekly Wire – Episode 67: Key Developments In Securities Fraud Class Action Litigation


Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Nelson Stewart with their discussion of significant developments in the securities fraud class action space, including analysis of two key rulings, class certification rates, and major settlements.

Check out today’s episode and subscribe to our show from your preferred podcast platform: Spotify, Amazon Music, Apple Podcasts, Samsung Podcasts, Podcast Index, Tune In, Listen Notes, iHeartRadio, Deezer, and YouTube.

Episode Transcript

Jerry Maatman: Thank you loyal blog readers for joining us for the next episode of our podcast series, the Class Action Weekly Wire. I’m Jerry Maatman, a partner in Duane Morris’ Chicago and New York offices, and joining me today is my colleague from our New York office, Nelson Stewart. Welcome.

Nelson Stewart: Thank you. Great to be here, Jerry.

Jerry: Today we wanted to discuss trends, issues, and important developments in the area of securities fraud class action litigation. Nelson, this is a big space, but could you give us, from your thought leadership perspective, some kind of summary of what you think are kind of key developments in this area?

Nelson: Sure, Jerry. Class action securities fraud claims typically involve an alleged public misrepresentation or omission made by the issuer of a security, a subsequent disclosure that reveals the statement or omission to be false, and a decrease in the value of the security resulting from the disclosure. Securities fraud claims readily lend themselves to class-wide treatment because the number of investors who may claim losses resulting from a misrepresentation is often considerable.

The principal federal statutes for securities fraud claims are the Securities Act of 1933 and the Securities Exchange Act of 1934. Both statutes were enacted for the purpose of regulating securities markets and providing increased disclosure and transparency for investors in the wake of the stock market crash in 1929.

The 1933 Act generally applies to misrepresentation made in connection with an initial offering of securities. The 1934 Act imposes liability for misrepresentations related to the purchase or sale of existing securities.

Jerry: Thanks, Nelson, for that framework. By my way of thinking, the absolute Holy Grail in class action litigation for the plaintiffs’ bar is class certification. They file the case, they certify it, and then they monetize it. How did plaintiffs fare over the last year in terms of certifying securities fraud class actions?

Nelson: In 2023, plaintiffs were incredibly successful in gaining class certification. The plaintiffs’ bar secured class certification at a rate of 97% – or put another way, 35 of 36 motions. Companies secured denials in 3% of the rulings, or just in one case.

Jerry: While we do a comparative study of securities fraud with respect to other areas of law, at least in 2023 securities fraud class certification rates were the highest. We recently did a mid-year report in 2024, and still very high, but down to about 67% – 10 out of 15 cases certified in the securities fraud area. In terms of the key guide posts on the playing field when it comes to securities fraud class action litigation, what are some of the key developments that corporate counsel should be aware of?

Nelson: One of the most notable decisions in 2023 was the U.S. Supreme Court’s ruling in Slack Technologies v. Pirani, et al. The Supreme Court addressed a split among the federal circuits created by the Ninth Circuit’s departure from a well-established interpretation of Section 11(a) of the 1933 Act. A plaintiff bringing a fraud claim under the 1933 Act must show that the purchase of shares at issue can be traced back to the false or misleading registration statement. The statute imposes strict liability and a lower standard of proof for a narrower class of securities than the 1934 Act, which applies to misrepresentations or omissions for any security, but carries a higher standard of that requires plaintiffs to show a scienter, reliance, and loss causation.

In Slack, plaintiffs had purchased shares through a direct listing that offered both registered and unregistered stock shares. The inability to trace unregistered shares to a registration statement would be fatal to plaintiffs’ claims under the 1933 Act. In denying defendant’s motion to dismiss the class action, the district court attempted to accommodate the traceability challenges of a direct listing through a broad reading of the “such security” phrase of Section 11(a). The district court held that the unregistered shares were “of the same nature” as shares subject to the registration statement and plaintiffs therefore had standing under Section 11(a) to bring the suit.

 

On appeal, the Ninth Circuit noted that the application of Section 11(a) to the direct listing was one of first impression and it affirmed the district court’s decision while rejecting its broader reading of Section 11(a). The Ninth Circuit expressed concern that the more restrictive reading of the statute advocated by Slack, and applied by other circuits, would limit an issuer’s liability for false or misleading statements through the use of a direct listing and thereby disincentivize the 1933 Act’s goal of transparency.

On further appeal, the Supreme Court vacated the Ninth Circuit’s decision and held that the language of the 1933 Act was intended to narrow its focus. Citing Sections 5, 6 and 11(e) as support for the conclusion that the term “such security” refers back to shares that are subject to the registration.

Slack confirms that the novelty of a specific type of offering, such as a direct listing, cannot excuse the well-settled requirements for claims brought under Section 11 of the 1933 Act. Unregistered shares from a direct listing or certain post-IPO offerings are subject to dismissal at the pleading stage for lack of standing under Section 11 if those shares cannot be traced back to the initial registration. Whether an issuer is required to register all shares for sale in a direct listing was not addressed in Slack because this question had not been raised in the prior proceedings.

Another key ruling came out of the Southern District of New York in a case titled Underwood, et al. v. Coinbase Global. There, plaintiffs brought claims under Sections 5 and 12(a) of the 1933 Act and Sections 5 and 29(a) of the 1934 Act. Plaintiffs alleged that Coinbase operated a securities exchange without registering with the SEC. Their amended complaint also alleged that the cryptocurrency tokens sold on the Coinbase platform were securities as defined under both statutes.

However, the issue of whether digital assets must be registered with the SEC was not determined because the court found the plaintiffs failed to state a claim under the 1933 Act and the 1934 Act. Section 5 of the 1933 Act prohibits any person from selling unregistered securities unless the securities are exempt from registration. Section 12(a) creates a private right of action for any buyer against the seller of an unregistered security. To meet the definition of a seller under Section 12(a), a seller must either pass title or other interest directly to the buyer, or the seller must solicit the purchase of a security for its own financial interest. The court granted Coinbase’s motion to dismiss the claims brought under 12(a) because the plaintiffs did not sufficiently plead either requirement.

The initial complaint had stated that there was no privity between a user of the Coinbase platform and Coinbase. The user agreement also expressly stated that Coinbase was simply an agent, and a user who purchased a token from through the online platform was not purchasing digital currency from Coinbase. Though the plaintiffs had attempted to avoid this issue by amending their complaint to state that privity only existed between the user and Coinbase, the court held that it would not allow an amended complaint to supersede the admissions in the plaintiffs’ earlier pleading, or the express language of the user agreement. These facts precluded an action against Coinbase under Section 12(a). The company did not meet the definition of a statutory seller as defined in Section 12(a) because it did not pass title directly to a buyer. The plaintiffs also failed to plead anything more than collateral participation in the purchase of the tokens. The court concluded that absent allegations that the plaintiffs purchased the tokens as a result of active solicitation by Coinbase, Section 12(a) was inapplicable.

The court further held that the plaintiffs’ claims under the 1934 Act also failed for lack of privity. Section 29(a) of the 1934 Act provides that every contract that violates any provision, rule, or regulation is void. The plaintiffs argued that the user agreement and the transactions were void because they involved contracts that were premised on an illegal purchase of an unregistered security on an unregistered exchange, which violated Section 5 of the 1934 Act. The amended complaint sought rescission of the transaction fees and the transactions. To allege a violation of Section 29(b), the plaintiff is required to show that: (i) the contract involved a prohibited transaction; (ii) the plaintiff is in contractual privity with the defendants; and (iii) the plaintiff is in a class that the 1934 Act intended to protect. The court again found that privity was not established under the user agreement. The initial complaint asserted that the plaintiffs contracted with users of the Coinbase platform, not Coinbase. Thus there was no contractual privity with Coinbase. The court also noted that the user agreement was not a contract that required the plaintiffs to do anything illegal. A party to the user agreement was free to use the platform to transact crypto currencies or not transact at all. The court concluded this was insufficient to render the sale of digital assets on the platform a prohibited transaction under Section 5 of the 1934 Act.

Recently, in April of 2024, the Second Circuit reversed the district court’s dismissal of alleged Securities Act violations, fin ding the district court improperly relied on the plaintiffs’ initial complaint and Coinbase’s user agreement, instead of looking solely to the allegations in the amended complaint. The Second Circuit noted that some versions of the user agreements in place when the transaction at issue occurred had conflicting language that could plausibly support the allegations that defendants had passed title to the plaintiffs under Section 12(a)(1) of the 1933 Act. The court upheld dismissal of certain claims brought under the Securities and Exchange Act of 1934, finding that the plaintiff’s conclusory out allegations provided insufficient detail to support a claim for rescission.

Jerry: Thanks for that analysis. Evident to see a lot of developments in this space over the past 12 months. In terms of that monetization of securities fraud class actions, how did the plaintiffs’ bar do on the settlement front?

Nelson: There were several settlements of over a billion dollars reached in securities fraud class actions last year, and the top 10 class action settlements in this space add up to $5.4 billion.

In SEC, et al. v. Stanford International Bank, the Court granted approval of a $1.2 billion settlement to resolve investors’ allegations that the banks aided Robert Allen Stanford’s $7 billion Ponzi scheme.

A $1 billion settlement was approved in In Re Dell Technologies Inc. Class V Stockholders Litigation, which was a class action brought by investors alleging Dell, its controlling investors, and its affiliates shortchanged shareholders by billions in a deal that converted Class V stock to common share.

And in In Re Wells Fargo & Co. Securities Litigation, another $1 billion settlement was approved in a class action brought by investors alleging that the company made misleading statements about its compliance with federal consent orders following the 2016 scandal involving the opening of unauthorized customer accounts.

Jerry: It seems like 2024 is equally upbeat for the plaintiffs’ bar. We’ve tracked through the first six months settlements totaling over $2 billion, with three individual  settlements near the half-billion mark: $580 million, $490 million, and $434 million for securities fraud class action settlements, so a very robust area for the plaintiffs’ bar.

Well, thanks so much for your insights, Nelson. Very, very helpful in this space. And thank you to our loyal listeners for tuning in to this episode of the Class Action Weekly Wire.

Nelson: Thanks everyone.

Posted on by Tyler Z. Zmick

Illinois Federal Court Dismisses Class Action Privacy Claims Involving Use Of Samsung’s “Gallery” App

By Tyler Zmick, Justin Donoho, and Gerald L. Maatman, Jr.

Duane Morris Takeaways:  In G.T., et al. v. Samsung Electronics America, Inc., et al., No. 21-CV-4976, 2024 WL 3520026 (N.D. Ill. July 24, 2024), Judge Lindsay C. Jenkins of the U.S. District Court for the Northern District of Illinois dismissed claims brought under the Illinois Biometric Information Privacy Act (“BIPA”).  In doing so, Judge Jenkins acknowledged limitations on the types of conduct (and types of data) that can subject a company to liability under the statute.  The decision is welcome news for businesses that design, sell, or license technology yet do not control or store any “biometric” data that may be generated when customers use the technology.  The case also reflects the common sense notion that a data point does not qualify as a “biometric identifier” under the BIPA if it cannot be used to identify a specific person.  G.T. v. Samsung is required reading for corporate counsel facing privacy class action litigation.

Background

Plaintiffs — a group of Illinois residents who used Samsung smartphones and tablets — alleged that their respective devices came pre-installed with a “Gallery application” (the “App”) that can be used to organize users’ photos.  According to Plaintiffs, whenever an image is created on a Samsung device, the App automatically: (1) scans the image to search for faces using Samsung’s “proprietary facial recognition technology”; and (2) if it detects a face, the App analyzes the face’s “unique facial geometry” to create a “face template” (i.e., “a unique digital representation of the face”).  Id. at *2.  The App then organizes photos based on images with similar face templates, resulting in “pictures with a certain individual’s face [being] ‘stacked’ together on the App.”  Id.

Based on their use of the devices, Plaintiffs alleged that Samsung violated §§ 15(a) and 15(b) of the BIPA by: (1) failing to develop a written policy made available to the public establishing a retention policy and guidelines for destroying biometric data, and (2) collecting Plaintiffs’ biometric data without providing them with the requisite notice and obtaining their written consent.

Samsung moved to dismiss on two grounds, arguing that: (1) Plaintiffs did not allege that Samsung “possessed” or “collected” their biometric data because they did not claim the data ever left their devices; and (2) Plaintiffs failed to allege that data generated by the App qualifies as “biometric identifiers” or “biometric information” under the BIPA, because Samsung cannot use the data to identify Plaintiffs or others appearing in uploaded photos.

The Court’s Decision

The Court granted Samsung’s motion to dismiss on both grounds.

“Possession” And “Collection” Of Biometric Data

Regarding Samsung’s first argument, the Court began by explaining what it means for an entity to be “in possession of” biometric data under § 15(a) and to “collect” biometric data under § 15(b).  The Court observed that “possession” occurs when an entity exercises control over data or holds it at its disposal.  Regarding “collection,” the Court noted that the term “collect,” and the other verbs used in § 15(b) (“capture, purchase, receive through trade, or otherwise obtain”), all refer to an entity taking an “active step” to gain control of biometric data.

The Court proceeded to consider Plaintiffs’ contention that Samsung was “in possession of” their biometrics because Samsung controls the proprietary software used to operate the App.  The Court sided with Samsung, however, concluding that Plaintiffs failed to allege “possession” (and thus failed to state a § 15(a) claim) because they did not allege that Samsung can access the data (as opposed to the technology Samsung employs).  Id. at *9 (“Samsung controls the App and its technology, but it does not follow that this control gives Samsung dominion over the Biometrics generated from the App, and plaintiffs have not alleged Samsung receives (or can receive) such data.”).

As for § 15(b), the Court rejected Plaintiffs’ argument that Samsung took an “active step” to “collect” their biometrics by designing the App to “automatically harvest[] biometric data from every photo stored on the Device.”  Id. at *11.  The Court determined that Plaintiffs’ argument failed for the same reason their § 15(a) “possession” argument failed.  Id. at *11-12 (“Plaintiffs’ argument again conflates technology with Biometrics. . . . Plaintiffs do not argue that Samsung possesses the Data or took any active steps to collect it.  Rather, the active step according to Plaintiffs is the creation of the technology.”).

“Biometric Identifiers” And “Biometric Information”

The Court next turned to Samsung’s second argument for dismissal – namely, that Plaintiffs failed to allege that data generated by the App is “biometric” under the BIPA because Samsung could not use it to identify Plaintiffs (or others appearing in uploaded photos).

In opposing this argument, Plaintiffs asserted that: (1) the “App scans facial geometry, which is an explicitly enumerated biometric identifier”; and (2) the “mathematical representations of face templates” stored through the App constitute “biometric information” (i.e., information “based on” scans of Plaintiffs’ “facial geometry”).  Id. at *13.

The Court ruled that “Samsung has the better argument,” holding that Plaintiffs’ claims failed because Plaintiffs did not allege that Samsung can use data generated through the App to identify specific people.  Id. at *15.  The Court acknowledged that cases are split “on whether a plaintiff must allege a biometric identifier can identify a particular individual, or if it is sufficient to allege the defendant merely scanned, for example, the plaintiff’s face or retina.”  Id. at *13.  After employing relevant principles of statutory interpretation, the Court sided with the cases in the former category and opined that “the plain meaning of ‘identifier,’ combined with the BIPA’s purpose, demonstrates that only those scans that can identify an individual qualify.”  Id. at *15.

Turning to the facts alleged in the Complaint, the Court concluded that Plaintiffs failed to state claims under the BIPA because the data generated by the App does not amount to “biometric identifiers” or “biometric information” simply because the data can be used to identify and group the unique faces of unnamed people.  In other words, biometric information must be capable of recognizing an individual’s identity – “not simply an individual’s feature.”  Id. at *17; see also id. at *18 (noting that Plaintiffs claimed only that the App groups unidentified faces together, and that it is the device user who can add names or other identifying information to the faces).

Implications Of The Decision

G.T. v. Samsung is one of several recent decisions grappling with key questions surrounding the BIPA, including questions as to: (1) when an entity engages in conduct that rises to the level of “possession” or “collection” of biometrics; and (2) what data points qualify (and do not qualify) as “biometric identifiers” and “biometric information” such that they are subject to regulation under the statute.

Regarding the first question, the Samsung case reflects the developing majority position among courts – i.e., a company is not “in possession of,” and has not “collected,” data that it does not actually receive or access, even if it created and controlled the technology that generated the allegedly biometric data.

As for the second question, the Court’s decision in Samsung complements the Ninth Circuit’s recent decision in Zellmer v. Meta Platforms, Inc., where it held that a “biometric identifier” must be capable of identifying a specific person.  See Zellmer v. Meta Platforms, Inc., 104 F.4th 1117, 1124 (9th Cir. 2024) (“Reading the statute as a whole, it makes sense to impose a similar requirement on ‘biometric identifier,’ particularly because the ability to identify did not need to be spelled out in that term — it was readily apparent from the use of ‘identifier.’”).  Courts have not uniformly endorsed this reading, however, and parties will likely continue litigating the issue unless and until the Illinois Supreme Court provides the final word on what counts as a “biometric identifier” and “biometric information.”

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