Class Action Defense

August 8, 2024 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.

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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.

August 5, 2024 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.

August 5, 2024August 5, 2024 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.

August 2, 2024 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.

August 2, 2024 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.

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.

July 28, 2024July 29, 2024 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.”

July 25, 2024August 7, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 66: Colorado Stakes Out Artificial Intelligence Frontier With Comprehensive Algorithmic Anti-Discrimination Law

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jerry Maatman and associate Tiffany Alberty with their discussion of a significant development on the forefront of artificial intelligence legislation – a Colorado bill recently signed into law making strides to curb the risk of algorithmic bias across all sectors and uses of AI technology.

Episode Transcript

Jerry Maatman: Thank you, loyal blog readers. Welcome to our next installment of our weekly podcast series, the Class Action Weekly Wire. I’m Jerry Maatman, a partner at Duane Morris and joining me today is my colleague, Tiffany Alberty. Welcome.

Tiffany Alberty: Thanks, Jerry, excited to be here.

Jerry: Today we wanted to discuss what I believe to be a landmark development coming out of the state of Colorado regarding artificial intelligence legislation, and specifically the new AI bill that was signed into law earlier this year. As a member both of the Illinois and Colorado bars, Tiffany, I know you’ve been advising employers on this – wondered what your takeaways were at a 100,000 foot level on this new law?

Tiffany: Sure. Thanks, Jerry, I appreciate the opportunity to speak today. So, as many of you know, on May 17th of this year, Colorado Governor Jared Polis signed into law SB-205, also known as the Consumer Protections for Interactions with Artificial Intelligence Systems. It does take effect in February of 2026, and it applies to Colorado residents. This bill was modeled after Connecticut’s ambitious legislation which ended up crumbling the same month due to the Connecticut Governor Ned Lamont’s concerns that it would stifle the innovation of the developing AI industry. So, comparing this legislation to AI laws such as in Florida or Utah. The statute is really the first legislation of its kind in the United States that focuses on what’s called “high-risk artificial intelligence systems”. Notably, it requires that developers and companies that deploy this high-risk AI technology use the standard of reasonable care to prevent algorithmic discrimination.

Jerry: Thanks for that overview, Tiffany, that’s very helpful. In terms of what corporate counsel need to understand about the concept of “high-risk AI systems,” how would you describe that in layman’s terms, and with respect to the range of activities or software covered by the new Colorado law?

Tiffany: Sure. So, the Colorado law defines “high-risk AI systems” as those that make or substantially contribute to making “consequential decisions.” Of course, it’s not clear, but some examples that would be considered as “consequential decisions” under the law include a large range of companies and services, including education enrollment or education opportunities, employment or employment services and opportunities, financing or lending services, essential governmental services, healthcare services, housing, insurance, and then, of course, legal services.

The law does actually carve out specific systems that would not be included in the law – that either (i) perform narrow procedural tasks; or (ii) detect decision making patterns or deviations from prior decision-making patterns, and that aren’t intended to replace or influence the human component of assessment and review. Also excluded from the law is AI-enabled video games, cybersecurity software, anti-malware or anti-virus software, spam or robocalling features and filters – all when they’re not considered a “substantial factor” in making these consequential decisions

Going to what a ”substantial factor” is – it’s defined as a factor that (i) assists in making consequential decisions and (ii) is capable of altering the overall outcome of that said consequential decision, or (iii) is generated by an AI system alone.

Jerry: Well on its face, that sounds quite broad, and I doubt that the exemptions are going to be used to swallow the rule. What do corporate counsel need to know about penalties and potential damages under the statute for violations of it?

Tiffany: Sure, so the penalties are hefty. The law provides the Colorado Attorney General with the exclusive authority to enforce violations and penalties up to $20,000 for each consumer or transaction violation that’s involved. However, the law does not contain a private cause of action. Developers as well as deployers can assert an affirmative defense if they discover and cure the violation, or are in compliance with the latest version of the Artificial Intelligence Risk Management Framework that’s published by the National Institute of Standards and Technology, or otherwise known as NIST, or any other framework that is designated by the Colorado Attorney General that should come out with more specific and narrow confines.

Jerry: The job of a compliance counsel is certainly difficult with the patchwork quilt of privacy laws, but what would your advice be specifically for companies involved in trying to engage in good faith compliance with the Colorado law?

Tiffany: Sure, great question. There are key responsibilities at stake for both developers of AI technology and deployers, which are the companies that are utilizing these systems, in terms of protecting consumers and employees from the risks of algorithmic discrimination. For AI developers, there is a duty to avoid algorithmic discrimination, and under the reasonable care standard, it includes several critical steps. So that would be providing deployers with detailed information about the AI systems and the necessary documentation for impact assessments; developers must make a public statement about the types of AI systems that they have developed or substantially modified; and disclose any potential risks of algorithmic discrimination to known deployers and the Colorado Attorney General within 90 days of discovery.

So that’s going to be for the AI developer side. Now, if you go to the other variation which is going to be for deployers of high-risk AI systems, they, too, have a duty under the law to avoid algorithmic discrimination, and they are required to implement comprehensive risk management policies, conduct impact assessments throughout the year, and review their AI systems annually to ensure that there’s no algorithmic discrimination occurring. They also need to inform consumers about the system’s decision-making processes and offer opportunities for correcting any inaccurate information that’s being collected and allow for appeals against adverse decisions upon human review, if that is feasible. And then the last thing that is similar to the AI developer side – deployers must also disclose any algorithmic discrimination discovered to Colorado’s Attorney General within 90 days of discovery.

So, kind of taking more of a bird’s eye view, the law encompasses AI technology when it’s involved in the consequential decisions, such as in an employment context for hiring and firing. And it adds another layer of intervention to check the AI process, and ensuring that it doesn’t have any type of discriminatory or bias intent. As such, companies have until February 2026 to come into compliance with this new Colorado AI law.

Jerry: Well, thanks, Tiffany. Those are great insights. I think the bottom line is compliance just became a bit tougher in terms of all the things that are out there in that wild west which is the legal frontier of artificial intelligence. If there’s nothing other than what we’ve seen from the plaintiffs’ bar is that they’ve been very innovative and using statutes like this and cobbling together class actions involving employer use of artificial intelligence. Well, thank you loyal blog readers for tuning in to this week’s weekly podcast series – we will see you next week with another topic.

Tiffany: Thanks, everyone.

July 23, 2024 by Gerald L. Maatman, Jr.

Ninth Circuit Broadly Applies The FAA’s Transportation Worker Exemption To Fueling Technicians To Green Light Their Class Action And Side-Step Arbitration

By Eden E. Anderson, Rebecca S. Bjork, and Gerald L. Maatman, Jr.

Duane Morris Takeaways: On July 19, 2024, in Lopez v. Aircraft Service International, Inc., Case No. 23-55015 (9th Cir. July 19, 2024), the U.S. Court of Appeals for the Ninth Circuit held that the Federal Arbitration Act’s (FAA) transportation worker exemption applies to an airplane fueling technician. Even though the technician had no hands-on contacts with goods, the Ninth Circuit held that was not required because fuel is necessary to flying the plane that holds the goods. The decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow that loop hole to mandatory arbitration. The Lopez decision presents an obstacle for employers seeking to enforce arbitration agreements and class action waivers within the Ninth Circuit, thereby opening the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

Case Background

Danny Lopez worked as a fueling technician at Los Angeles International Airport. He added fuel to airplanes. After Lopez filed a wage & hour class action against his employer, the employer moved to compel arbitration. The district court denied the motion, concluding that Lopez was an exempt transportation worker because he was directly involved in the flow of goods in interstate or foreign commerce. It reasoned that, although Lopez did not handle goods in commerce, he was directly involved in the maintenance of the means by which the goods were transported. The employer appealed on the grounds that the FAA’s transportation worker exemption is to be narrowly construed and that Lopez did not have any hands-on contact with goods and direct participation in their movement.

The Ninth Circuit’s Decision

The Ninth Circuit began its analysis by mentioning the U.S. Supreme Court’s 2022 decision in Southwest Airlines Co. v. Saxon, 596 U.S. 450 (2022). In Saxon, the U.S. Supreme Court instructed that the transportation worker exemption is to be narrowly construed and does not turn on the industry within which the work is performed. Saxon held that airline ramp agents are nonetheless transportation workers exempt from the FAA because, in loading and unloading cargo onto airplanes, ramp agents play a “direct and necessary role in the free flow of goods across borders” and are “actively engaged in the transportation of those goods across via the channels of foreign or interstate commerce.” Id. at 458. Perceiving that the transportation worker exemption continued to be misapplied by lower courts, the U.S. Supreme Court repeated this same guidance this year in Bissonnette v. Le Page Bakeries Park St., LLC, 601 U.S. 246 (2024), and cautioned that the exemption should not be applied broadly to all workers who load and unload goods as they pass through the stream of interstate commerce.

While mentioning this recent controlling authority, the Ninth Circuit harkened back to its 2020 analysis of the transportation worker exemption in Rittman v. Amazon.com, Inc., 971 F.3d 904 (9th Cir. 2004), deeming it consistent with Saxon and Bissonnette. In Rittman, the Ninth Circuit held that Amazon delivery drivers making local, last mile deliveries of products from Amazon warehouses to customers’ homes were exempt transportation workers engaged in interstate or foreign commerce. Applying “the analytical approach applied in Rittman,” the Ninth Circuit concluded that Lopez was an exempt transportation worker because his fueling of airplanes was a “vital component” of the plane’s ability to fly. Id. at 12.

Implications Of The Decision

The Lopez decision is yet another from the Ninth Circuit broadly applying the FAA’s transportation worker exemption, in spite of multiple recent decisions from the U.S. Supreme Court directing narrow interpretation. The Lopez decision opens the door to arguments that workers who do not even handle goods in the stream of commerce are exempt from arbitration if their work somehow supports the mechanism by which the goods travel.

July 18, 2024July 18, 2024 by Class Action Defense

The Class Action Weekly Wire – Episode 65: Key Developments In RICO Class Action Litigation

Duane Morris Takeaway: This week’s episode of the Class Action Weekly Wire features Duane Morris partner Jennifer Riley and associate Kelly Bonner with their discussion of key rulings, settlements, and trends analyzed in the RICO class action space.

Episode Transcript

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

Kelly Bonner: It’s great to be here, Jen.

Jennifer: Today we wanted to discuss trends and important developments in Racketeer Influenced and Corrupt Organizations Act, or RICO, class action litigation. RICO is a federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal enterprise. The Congress enacted the RICO in 1970 in an attempt to combat organized crime in the United States. The law has since been used to prosecute a variety of offenses, including securities fraud, money laundering, and even environmental crimes. Kelly, can you explain the burden on the plaintiff in a RICO action?

Kelly: Sure thing, Jen. RICO allows the government to prosecute individuals associated with criminal activities such as the leaders of crime organizations. Although there are criminal charges, today we’re going to focus on the burden for civil RICO claims. So, plaintiff must prove three elements: criminal activity, so that means the plaintiff must show that the defendant committed a RICO crime; a pattern of criminal activity, which means that the plaintiff must show that the defendant committed a pattern of at least two crimes – patterns can include everything from the same victim to the same methods used to commit the crimes, or that the crimes even happened within the same year; also the statute of limitations – in civil RICO cases, the statute of limitations is four years, and that runs from the time of discovery. Plaintiff must also prove the existence of an enterprise. So, civil RICO class actions are significant pieces of litigation, and due to the potential for exposure to treble damages – or, you know, three times the damages – such class actions can present extraordinary risks.

Jennifer: Thanks, Kelly, very different from the types of claims that we often discuss on the podcast. How often are RICO class actions granted class certification?

Kelly: So in 2023, the plaintiffs’ bar secured class certification at a rate of approximately 70%. Companies secured denials in 30% of the rulings – so plaintiffs were largely successful in certifying the class.

Jennifer: Can you discuss any key rulings from 2023?

Kelly: Sure. So, in several 2023 cases, courts granted class certification under Rule 23(b)(3). So this is where the court concluded that common questions of law, in fact, predominated over individual issues, and that a class method was superior to other available methods for fairly and efficiently adjudicating the controversy. So, for example, in Turrey, et al. v. Vervent, Inc., the court concluded that common questions were dominated over individualized issues where plaintiffs alleged that defendants violated RICO by offering high cost education programs and a sham private student loan program called the Program for Educational Access and Knowledge, or PEAKS. This program saddled students with significant debt and inferior credentials. Plaintiffs sought class certification on the basis that they identified several common questions that could be resolved on a class-wide basis: 1) whether defendants knew that PEAKS was a fraudulent scheme designed to defraud investors and the U.S. Department of Education; 2) whether loans lacked legally required information; 3) whether PEAKS operated as an association, in fact, enterprise; 4) whether PEAKS as an enterprise made fraudulent representations, and 5) finally, whether the PEAKS enterprise use the mail and interstate wire system for its activities. The court opined that all of the elements of a substantive RICO violation could be determined through evidence common to class members. The court also noted that expert testimony sufficiently established that defendants knowingly participated in fraudulent scheme, and that PEAKS was structured to further defend its fraudulent goals. The court also ruled that questions of causation and injury could be addressed on a class-wide basis, since the plaintiffs allege that defendants conduct was the actual approximate cause of their injuries, and that their harms were foreseeable. So, if the loans had not been made or serviced as they were, the borrowers would not have made the payments. Even though the exact amount of damages differed among individual borrowers, the court concluded that this issue did not preclude class certification.

Jennifer: There’s also an interesting ruling that I wanted to mention, that came out of the Fourth Circuit in a case called Albert, et al. v. Global Tel*Link Corp. In that case, the Fourth Circuit vacated and remanded a ruling by the district court dismissing the plaintiffs’ RICO claims based on a failure to establish proximate causation. The Fourth Circuit concluded that the plaintiffs’ alleged injuries were the direct result of defendants’ scheme, and thus sufficient to allege RICO violations. In that case, the plaintiffs were families of prison inmates. They filed a class action alleging that the defendants, a group of providers of inmate telephone services, violated the RICO by colluding to fix prices for single call offerings, as well as misleading the government about their pricing structures, and ultimately causing consumers to pay inflated prices. The district court had dismissed the plaintiffs’ RICO claims on the basis that the plaintiffs did not adequately allege that the defendants proximately caused their injuries, as their harm was contingent upon harm suffered by the contracting governments. On appeal though, the Fourth Circuit vacated and remanded, the Fourth Circuit concluded that even though the alleged conspiracy occurred before it impacted the plaintiffs, the government was not a more direct victim than the plaintiffs, and the plaintiffs’ injuries were not derivative of those suffered by the governments because they would have been charged inflated prices regardless of whether the governments were injured. The Fourth Circuit clarified that the plaintiffs need only alleged facts plausibly supporting a reasonable inference of causation, and that the plaintiffs’ complaint plausibly supports an inference that the governments would have demanded lower prices for consumers but for defendants’ misrepresentations. Because the Fourth Circuit concluded that the plaintiffs’ alleged injuries were the direct result of defendants’ scheme, and therefore sufficient to allege RICO violations, it vacated the district court’s ruling and remanded for further consideration.

Kelly, how did the plaintiffs do in securing major settlements in the RICO class action space over the past year?

Kelly: So, there were several settlements and judgments that were over a million dollars reached in RICO civil class actions in 2023. So I’m thinking of in Lincoln Adventures LLC, et al. v. Those Certain Underwriters at Lloyd’s London Members of Syndicates, the court granted final approval of a $7.9 million settlement to resolve claims that Lloyd’s Syndicates violated RICO with an illegal anticompetition agreement. A massive RICO default judgment of over $131 million was entered by the court in Gilead Sciences Inc., et al. v. AJC Medical Group Inc., based on allegations that dozens of companies and individuals were involved in parallel schemes run by two healthcare networks profiting from illegal resale of HIV treatment medications. And then finally, in Zwicky, et al. v. Diamond Resorts, which comes out of Arizona, the court granted file approval to a settlement of $13 million, resolving allegations under RICO that defendants misrepresented the required annual fees for timeshare interest they purchased.

Jennifer: Thanks so much, Kelly. I know that these are only some of the cases that had interesting rulings in 2023 and RICO class actions. 2024 is sure to give us some more insights into the ways that class actions will evolve or continue to evolve in the RICO space. Thanks to all of our listeners for joining us today, appreciate having you here for this episode of the Class Action Weekly Wire.

Kelly: Thanks so much. Bye-bye.

July 16, 2024 by Class Action Defense

Maryland Federal Court Refuses To Certify “Class Of One” In ERISA Bar Tips Case

By Gerald L. Maatman, Jr., Zachary J. McCormack, and Jesse S. Stavis

Duane Morris Takeaways: On July 10, 2024, Judge Peter J. Messitte of the U.S. District Court for the District of Maryland denied a bartender’s motion to certify a class of approximately 2,300 restaurant workers in Frankenstein v. Host Int’l, Inc., No. 8:20-CV-01100, 2024 U.S. Dist. LEXIS 120678 (D. Md. July 10, 2024). Plaintiff alleged that his employer violated the Employee Retirement Income Security Act (“ERISA”) by forcing tipped workers to accept gratuities in cash which prevented them from making pre-tax contributions to retirement accounts. The Court held that Plaintiff could not represent the class because he failed to show that any other employees opposed the policy. The ruling serves as a reminder to employers about the importance of considering conflicts within a putative class when opposing class certification.

Case Background

Defendant Host International, Inc. (“Host”), headquartered in Bethesda, Maryland, operates restaurants and bars, many of which are located in airports. Id. at *2. The company has a longstanding practice of paying out credit card tips in cash at the end of workers’ shifts. Id. at *4. While employees tend to support this policy, it has one unintended effect: An employee aiming to contribute a large percentage of his or her income to a 401(k) account is not able to do so using pre-tax earnings. Id. A bartender, Dan Frankenstein, objected to this policy, claiming his inability to contribute these pre-tax earnings to his retirement account prevented him from meeting his retirement goals. Id. at *8. This policy, he argued, violated § 502 of the ERISA, which allows plan participants to sue for breach of fiduciary duties. Id. at *9. He further claimed Host’s refusal to permit employees to defer credit card tips amounted to discrimination against tipped-employee participants, and that Host’s decision to prevent such deferrals is arbitrary and capricious. Id. at *10.

After the Court denied Host’s motion to dismiss, Frankenstein filed a motion to certify a class that would include all tipped workers who participated in the 401(k) plan and who had elected to defer some of their income. Id. The Court ordered evidentiary hearings and limited discovery to determine both the parameters of the class and the extent of any objections by its putative members. Id. at *11. Ultimately, Host presented witnesses who testified that many employees, and the unions that represented them, supported the tips-in-cash policy. Id. at *14. In response, Frankenstein was unable to present any evidence that other workers were unhappy with the policy. Id. at *15.

The Court’s Ruling

The Court denied Frankenstein’s motion for class certification. It held that Plaintiff had failed to demonstrate numerosity, commonality, typicality, and adequacy of representation under Rule 23(a). Id. at *17-18.

According to the Court, Frankenstein could not represent a class of aggrieved workers because he appeared to be the only aggrieved worker. Id. at *32. In fact, the tips-in-cash policy was exceptionally popular among Host’s employees. Id. at *33. When the company tried to change the policy by paying tips through an electronic debit card, many workers complained and the union representing employees filed an unfair labor practices charge with the National Labor Relations Board. Id. at *9. Despite Frankenstein’s yearlong opportunity to identify other employees who shared his complaints, he failed to present even one other individual. Id. at *28. The Court opined that the existence of an “intraclass conflict” proved fatal to Frankenstein’s motion for class certification. Id. at *22. Considering that Plaintiff appeared to present what the Court called as a “class of one,” he could not establish numerosity. Id. at *32. Further, due to his inability to point to other workers who shared his grievances, the Court concluded that he could not establish commonality or typicality. Id. at *28. Finally, considering Frankenstein’s views differed from those shared by other members of the putative class, the Court ruled that Plaintiff could not adequately represent the interests of the class. Id. at *25.

Implications Of The Decision

Frankenstein highlights the importance of investigating and considering potential intra-class conflicts when responding to motions for class certification. Evidence showing that members of the putative class disagree on fundamental issues in a lawsuit can help defendants establish that a class action is not appropriate. While Frankenstein presents a particularly dramatic example — the named plaintiff appeared to the only employee in the country who opposed his employer’s policy — this strategy also should be considered when different groups of putative class members disagree with one another.