Friday, October 22, 2010

Northern California Judges Rule in Class Actions

President Bush signs the Class Action Fairness Act of 2005
Photo Courtesy of
Several U.S. District Court for the Northern District of California Judges have ruled in class actions.

As explained in in Montgomery Ward & Co. v. Langer (8th Cir. 1948),
The class action was an invention of equity [,] mothered by the practical necessity of providing a procedural device so that mere numbers would not disable large groups of individuals, united in interest, from enforcing their equitable rights nor grant them immunity from their equitable wrongs.
The theory has not moved far from its common law roots, today Federal Rule of Civil Procedure 23(a) provides:
One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
In re Conseco Life Insurance Company involves life insurance policy holders who claim that Conseco's policy changes amount to "breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, and negligent misrepresentation."  The Plaintiffs purchased life insurance policies which included a monthly fee based on an undisclosed equation on the risk of a payout of the policy.  In October 2008, Conseco sent a letter to policyholders stating it had changed the equation and they needed to pay more into the policies.  The New York State Insurance Commission investigated and settled its own claim against Conseco, now some 10,000 policyholders are suing the insurance provider.  The present motion deals with class certification.

There is no question about numerosity.  However, commonality is disputed.  Conseco claims that variations in the different policy holders state contract law prohibit efficient resolution of the class action. Judge Susan Illston stated this was not a problem because the court could "group[] similar state laws together and apply[] them as a unit."

However, Judge Illston refused to certify a subclass of California plaintiffs on the breach of the implied covenant of good faith and fair dealing, fraud, and negligent misrepresentation claims.  Plaintiffs argued that in the alternative of a breach of contract action, Conseco's statements that the policies were underfunded were intentional fraud.  The Court found this discrepancy unmanageable and did not certify the class.

Juarez v. Jani-King is a class action over the sale of franchises by Jani-King of California.  The lawsuit is unwieldy containing fourteen causes of action.  Currently before the court is the plaintiff's motion to certify the class.  The motion to certify contains sixty exhibits containing over four thousand pages.  Perhaps unsurprisingly, the plaintiffs filed a request to exceed the twenty-five page limit for briefs under the court's Local Rule of Civil Procedure 7.4(b).  Judge Samuel Conti denied the request.

Creatively, the plaintiffs had Whitney Hutson submit a declaration over a dozen pages long which is almost exclusively cited in the plaintiffs statements of facts section of their brief in support of their motion to certify the class.  Jani-King objected to the declaration stating it was both "an end run" around the page limit requirement and a invalid declaration because it contained information outside of Ms. Hutson's personal knowledge.  The defendant moved to strike it and then deny class certification for lack of factual support.

Judge Conti agreed with Jani-King, struck the declaration and denied the motion to certify.  However, he gave them an opportunity to refile a motion to certify the class which complies with the Federal and Local Rules of Civil Procedure.

In Holliday v. Lifestyle Lift, Rebecca Holliday sued Lifestyle Lift and two of its corporate officers David Kent and Gordon Quick in two simultaneous putative class actions.  The first is nationwide and covers a failure to pay overtime under the the Fair Labor Standards Act (FLSA).  The second is a California class action over a fail to provide meal and break periods as required by the California Labor Code.

Lifestyle Lift is not the actual name of the defendant, rather it is Scientific Image Center Management (“SICM”). SICM is a Michigan corporation and maintains its principle place of business in Troy, Michigan. SICM employs “schedulers” such as Ms. Holliday at centers that perform facial plastic surgical procedures.  SICM argues that the Eastern District of Michigan is the appropriate form and seeks to transfer the action or dismiss it outright.

Judge Richard Seeborg noted that SICM engaged in employment agreements with the schedulers in California giving the Court personal jurisdiction.  Additionally, Ms. Holliday filed the suit first in the Northern District of California and the individual defendants have previously traveled to California making the forum at least minimally convenient for them.  He denied the motion to dismiss or transfer.

The International Business Times is covering Judge Richard Seeborg's recent dismissal with leave to amend of a class action securities fraud complaint in In re NVIDIA Securities Class Action.  This blog has previously covered the difficulties of pleading a complaint in a securities class action lawsuit:
To state a claim under § 10(b), a plaintiff must allege: "(1) a misrepresentation or omission of material fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss." In re Gilead Sciences Securities Litig. (9th Cir. 2008).
Misrepresentation involves the logically difficult task of proving a negative. For each event listed above, Rackable gave a reason: accounting oversight (to the tune of $6M), changes in the marketplace and changes in customer demands. In order to prove misrepresentation, the plaintiffs would have to show that the officers were knew they were lying when then offered those reasons for missing earnings estimates. To prove the negative, the plaintiffs needed to show that they have fully examined the range of possibilities which only result in one remaining observable conclusion: fraud. For instance, they averred that there was a negative internal report that showed that the officers were lying when they made the earnings estimates. However, the plaintiffs did not have the report and were simply eluding to its existence, which puts the report outside of the observable sphere and fails to prove the negative. The Ninth Circuit reached the same conclusion in In re Silicon Graphics Securities Litigation.
According to court documents, between August 2007 and September 2007, NVIDIA received reports from Dell and Hewitt Packard (HP) that NVIDIA's computer processing chips were failing at a high rate.  Dell and HP then released an update to the Basic Input / Output System (BIOS) which mitigated some of the problems while NVIDIA designed a replacement chip.  NVIDIA released the replacement chip in May 2008.  On July 2, 2008 NVIDIA made a press release stating it would reduce revenue by $150-200M.  NVIDIA's stock price subsequently fell from $18.03 per share to $12.49.

Under the plaintiff's theory, the defendants knew their chips were defective and they should have anticipated a loss as a result.  Since they didn't, they issued misleading financial statements on November 8, 2007, November 22, 2007, March 21, 2008 and May 22, 2008  that misrepresented its financial position in violation of Section 10(b) of the Securities and Exchange Act.

Judge Richard Seeborg explained that the complaints from Dell and HP fail to show that NVIDIA knew the chips were defective.  For them to be sufficient, the complaint would have to explain who made the complaints, who received them, and how these complaints caused the company to realize that its chips were defective.  Similarly, there was no evidence of scienter or loss causation.  He dismissed the complaint with leave to amend.

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