The United States Supreme Court will decide this term whether a strategy used by some class action defendants to minimize class action liability—including some banks in recent class actions—will continue to be a viable strategy to eliminate class action lawsuits. So-called “pick-off” settlements have long been controversial, and that controversy has now reached the high court.
Because class actions bring with them the prospect of business-crushing liability, along with large attorneys’ fee awards, some defendants have managed that liability by “picking off” the named plaintiff. That is—offering full recovery to the named plaintiff under Rule 68 of the Federal Rules of Civil Procedure in federal cases or, in state cases, providing the named plaintiff with all the relief they claim they should receive in the lawsuit. The defendant will then bring a motion to dismiss the lawsuit, arguing that the named plaintiff no longer has claims that are typical of the class he or she seeks to represent, and without a named plaintiff, the lawsuit cannot continue. These so-called “pick-off” settlements can be an effective way to minimize class action exposure.
On October 14, 2015, the Supreme Court heard oral argument in Campbell-Ewald Co. v. Gomez, 135 S. Ct. 2311 (May 18, 2015), and will decide whether “pick-off” settlements will continue to be available to defendants in federal class actions. In Gomez, a TCPA case, the defendant filed a notice of offer of judgment under Rule 68 before the plaintiff filed his motion for class certification. Gomez v. Campbell-Ewald Co., 805 F. Supp. 2d 923, 926 (C.D. Cal. 2011). The Rule 68 offer would have provided the named plaintiff a payment of $1,503 for every communication he allegedly received from the defendant, a payment of any costs the plaintiff would recover if he prevailed in the action, and a stipulation to the entry of an injunction prohibiting the defendant from engaging in alleged “wireless spam activities.” Id. The Rule 68 offer represented everything the named plaintiff sought on his individual claims in the lawsuit. Id.
After the named plaintiff rejected the Rule 68 offer, the defendant filed a motion to dismiss, arguing that the unaccepted Rule 68 offer of judgment mooted the named plaintiff’s claims by offering all relief he sought, rendering him an inadequate class representative and thereby mooting the class claims as well. Id. at 927-28. The district court denied the motion to dismiss, holding that the class action defendant cannot “make an end-run around a class action simply by virtue of a facile procedural ‘gotcha,’ i.e., the conveyance of a Rule 68 offer of judgment to ‘pick off’ the named plaintiff prior to the filing of a class certification motion.” Id. at 930.
The defendant appealed to the Ninth Circuit, which also rejected the mootness argument. Gomez v. Campbell-Ewald Co., 768 F.3d 871, 874-76 (9th Cir. 2014). According to the Ninth Circuit, “[a]lthough this issue was unsettled until recently, we have now expressly resolved the question. ‘[A]n unaccepted Rule 68 offer that would fully satisfy a plaintiff’s claim is insufficient to render the claim moot.’” Id. at 874-75 (quoting Diaz v. First American Home Buyers Prot. Corp., 732 F.3d 948, 950 (9th Cir. 2013)).
The Supreme Court granted certiorari because, unlike the Ninth Circuit, the Third, Fourth, Fifth and Seventh Circuits all have held that an unaccepted Rule 68 offer of full compensation does moot the named plaintiff’s claim. For example, in Weiss v. Regal Collections, 385 F.3d 337 (3d Cir. 2004), the Third Circuit held that a Rule 68 offer of complete relief to the named plaintiff before class certification “will generally moot the plaintiff’s [individual] claim, as at that point the plaintiff retains no personal interest in the outcome of the litigation.” Id. at 340. If the named plaintiff no longer has any stake in the litigation after he or she settles the individual claim or refuses an offer of full compensation under Rule 68, he or she, the argument goes, is no longer an adequate class representative. The class action attorney (who is the real interested party in the class action) must then either find another plaintiff to represent the class in the litigation (with claims typical of the putative class), or the class claim must be dismissed for want of a representative plaintiff. See Genesis Healthcare Corp. v. Symczyk, ___ U.S. ___, 133 S. Ct. 1523, 1529 (2013) (“the mere presence of collective-action allegations in the complaint cannot save the suit from mootness once the individual claim is satisfied”).
If the Supreme Court sides with the Third, Fourth, Fifth and Seventh Circuits in Gomez, class action defendants will have a powerful tool to manage class action liability. Because the liability that a defendant may have to any one individual plaintiff will generally pale in comparison to the liability that the defendant faces if an adverse judgment is rendered on a class-wide basis, it might often make sense to satisfy the named plaintiff’s claims in full, rather than risk a company-crushing damages award in the class action. If, on the other hand, the Supreme Court sides with the Ninth Circuit, a powerful tool will be lost in those jurisdictions where it remains available today.
Even though the Supreme Court’s decision in the Gomez case directly affects only class actions brought in federal court, it could also have an effect on whether pick-off settlements can be used in class actions filed in California state court. Like the courts of the Ninth Circuit, the California state courts have been quite hostile to the use of pick-off settlements in state court class actions. However, because there is no California statute that governs the dismissal of class actions, California courts “have previously suggested that trial courts, in the absence of controlling California authority, utilize the class action procedures of the federal rules.” La Sala v. American Sav. & Loan Ass’n, 5 Cal. 3d 864, 872 (1971). Accordingly, if the Supreme Court decides that Rule 23 permits a class defendant to force a settlement on the named plaintiff and moot his or her class claims in that way, there may be room for argument that the California courts ought to follow suit.
Reports from the October 14 oral argument of the Gomez case before the Supreme Court suggest that the Court’s four conservative justices—Alito, Roberts, Scalia and Thomas—appeared to align themselves with Campbell-Ewald’s position, while the four liberal justices—Kagan, Ginsburg, Sotomayor and Souter—appeared to agree with Gomez that a Rule 68 offer of full relief does not moot an uncertified putative class action. As usual, Justice Kennedy appeared on the fence, and will likely swing the court one way or the other when the vote comes down. It should also be noted that the Rule 23 Subcommittee of the Supreme Court’s Advisory Committee on Rules of Civil Procedure is exploring whether to recommend amendments to Rule 23 that would prohibit pick-off settlements altogether. Whether the Supreme Court, and ultimately Congress, would approve such an amendment if it were proposed remains to be seen.
No matter how the Supreme Court ultimately rules on Gomez, changes are coming to how Rule 68 is applied in class actions in a large part of the country. Banks would be wise to watch the Supreme Court’s decision in Gomez —as well as the progress of the Rule 23 Subcommittee—closely.
For further information about the Gomez case or the progress of the Rule 23 Subcommittee, please contact Joseph W. Guzzetta at jwg@severson.com.