Article on impact of Second Circuit's "light" cigarettes opinion on consumer class actions

Findlaw.com had an article last week on the Second Circuit's recent class certification opinion, McLaughlin v. American Tobacco Co., ___ F.3d ___ (2d Cir. Apr. 3, 2008) (discussed briefly in this blog post). In "The U.S. Court of Appeals for the Second Circuit Deals a Severe Blow to the Plaintiffs in a Class Action Involving Allegations of Fraud Relating to 'Lights' Cigarettes," Findlaw.com (April 8, 2008), Professor Anthony J. Sebok asked whether McLaughlin "shuts the door for furture consumer class actions" in the Second Circuit. His ultimate answer was no, and he explains why:

I don't think so. It is important to note that the Second Circuit went out of its way to distance itself from the Fifth Circuit's 1996 decision in Castano v. Am. Tobacco Co., [84 F.3d 734 (5th Cir. 1996),] which the Second Circuit described as imposing a "blanket rule" against class certification whenever issues of individual reliance exist.

Furthermore, the phrase "material variation," which the court used to map out the boundary between acceptable and unacceptable class-wide treatment, is not meaningless -- although [plaintiffs' counsel Michael] Hausfeld, in oral argument, seemed to suggest it was.

Rather, "material variation" clearly contemplates that will be some individual differences between the reasons for reliance among the members of a class. Thus, it does not require, for certification, a presumption that all members of the class have identical reasons for acting (as is the case in fraud-on-the-market in the securities context, where investors are presumed to all know about and act on public information).

Consider, for example, a hypothetical consumer fraud claim based on the purchase of word-processing software that fails to work with a certain type of computer, despite contrary representations by the manufacturer on the box. It may be the case that some of the class of consumers who purchased the software did not, in fact, rely on that representation. For example, some of these purchasers might not have owned a computer incompatible with the software until after they bought the software, so the misrepresentation may have been irrelevant to them at the point of purchase.

However, one might assume that, at the point of purchase, all of the purchasers would have placed a value on the full functionality of the software, even if their decision to buy was not motivated by a desire to exploit that functionality. Let's assume -- quite realistically, I think -- that functionality with a typical range of computers is part of the core set of elements that consumers expect in a commercial software program. If so, then the fact that some did not actually subjectively respond to the misrepresentation about functionality should not be, even after last week's Second Circuit decision, a bar to class certification. That is because the differences in various class members' reasons for purchasing the software do not vary in any "material" sense, and thus, the hypothetical class proposed by this example should not fail the Second Circuit's "material variation" test.
If I am correct, then the news for consumer class actions is not as bleak as some commentators have suggested -- although Hausfeld's tactics in oral argument last year have not made things any easier for the plaintiffs' bar. Instead, it is most accurate to say simply that the rules for class-wide reliance in the Second Circuit were not settled in McLaughlin. If anything, the hard work of developing a coherent set of rules has just begun.

(Italics and hyperlink added.) While California class certification law looks nothing like McLaughlin, Professor Sebok's conceptualization of common reliance nonetheless could be useful in some UCL and CLRA cases.

Comments

[J.H.]

I actually think that Professor Sebok's hypothetical is a poor one, and I have some personal experience with the situation he describes. I once bought a software program that said it was Macintosh compatible on the box, and it turned out not to be. I ended up giving it to my brother, who had a Windows machine, and he was completely happy with it, while I was highly disappointed.

The bottom line is that in the software market, buyers really only care whether the software is compatible with the machine they plan to us it on (and/or on an upgraded machine they plan to purchase in the future). A Macintosh user doesn't care about Windows compatibility and vice versa, and a Windows XP user doesn't care about Windows 2000 compatibility. I do see this as a "material variation" in the expectations and reliance of different buyers.

And in general, for any product, unless there is a significant secondary/used-product market, I don't think that buyers would put value on functionality they never intend to use.

That being said, I agree that the test in this case is not an end to consumer class actions. What it may well portend though is smaller classes and/or more use of subclasses. In the example from my own personal experience, I think a class of purchasers of the software who also owned Macintosh computers would probably be proper, but I don't see how owners of Windows machines would be similarly situated.