Third Circuit Class Action Litigation | Fall 2019
Third Circuit holds that cy pres settlements are not per se unreasonable.
In this case, the Third Circuit addressed two issues for the first time: (1) whether a class settlement is per se unreasonable if the only monetary component is a cy pres payment, and (2) whether a cy pres award is per se unreasonable if the recipient has a connection with the defendant or class counsel. The panel answered both questions in the negative.
The case involved “cookies” that allegedly operated even if the user employed privacy settings. The district court approved a settlement under Rule 23(b)(2) where defendant agreed to stop using the cookies, class counsel would be paid $5.5 million, cy pres distributions would be made to six data privacy organizations, and defendant would be released from all claims, including monetary claims.
On appeal, the Third Circuit considered whether a class settlement is per se unreasonable if the only monetary benefit to the class is a cy pres distribution. The panel recognized that such a settlement has the capacity to create a conflict of interest. 934 F.3d at 327. But in a situation where it would be infeasible to compensate individual class members and where the cy pres distributions would have a deterrent effect on the defendant, the court held it is not necessarily an abuse of discretion to approve a “cy pres only” settlement.
The panel nevertheless reversed because the district court did not conduct a rigorous analysis of the scope of the release or the relationship of the cy pres recipients with the parties. On the release, the court noted that releasing monetary claims in a Rule 23(b)(2) settlement raises a “red flag” and questioned whether such a release ever would be appropriate or may require some heightened form of notice. Id. at 329-30. On the cy pres issue, the court remanded for further fact finding to “determine whether [the cy pres recipients] have a significant prior affiliation with any party, counsel, or the court . . . and, if so, whether the selection process failed to satisfy Rule 23(e)(2) by raising substantial questions whether the recipients were chosen on the merits.” Id. at 331.
Third Circuit confirms that a warranty of “materials and workmanship” does not cover alleged design defects.
This case involved claims against an automaker based on an alleged malfunction in the fuel tank of plaintiff’s vehicle. Plaintiff filed a putative class action asserting claims for breach of express warranty, violation of the New Jersey Consumer Fraud Act (NJCFA), and breach of the duty of good faith and fair dealing. The district court granted defendant’s summary judgment motion, dismissing all claims except for the NJCFA claim, and denied class certification as moot. An appeal followed.
The Third Circuit first considered whether the denial of class certification divested the court of subject matter jurisdiction under CAFA. The panel followed other circuits and determined that subject matter jurisdiction remained. The panel reasoned that CAFA’s “conferral of jurisdiction plainly encompasses a suit like [plaintiff’s], which was ‘filed under [R]ule 23,’ notwithstanding its eventual failure to become certified under Rule 23.” 932 F.3d at 119.
The court next considered the district court’s dismissal of plaintiffs’ express warranty claim. The warranty at issue stated that the automaker would “repair, replace, or adjust all parts on [plaintiffs’] vehicle that are defective in factory-supplied materials or workmanship.” The defendant argued that this warranty did not apply to plaintiffs’ design defect claim, and the panel agreed. Recognizing that this was an open issue under New Jersey law, the panel interpreted the plain meaning of the warranty, used the dictionary definitions of the terms “workmanship,” “materials,” and “design,” and determined that the warranty did not extend to design defect claims. The panel also relied on the distinction historically drawn by courts in products liability actions between a “workmanship” claim and a “design” claim.
New Jersey Supreme Court declines to enforce unclear arbitration provision.
The New Jersey Supreme Court has again addressed the enforceability of an arbitration provision in a consumer contract. Kernahan follows the New Jersey Supreme Court’s decision in Atalese v. U.S. Legal Servs. Grp., L.P., 219 N.J. 430 (2014), in which the Court declined to enforce an arbitration provision in a consumer contract that did not explain that the consumer was waiving the right to sue in court. Id. at 436. The Atalese Court found there was no “mutual assent [to arbitrate], as determined under customary principles of contract law.” Id. at 442.
The plaintiff in Kernahan filed a putative class action alleging that the “home service contract” she entered into with the defendants violated the New Jersey Consumer Fraud Act, the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act, and the implied covenant of good faith and fair dealing. The trial court denied the defendants’ motion to compel arbitration, finding that the arbitration provision in the contract did not comply with Atalese, and the Appellate Division affirmed.
The New Jersey Supreme Court granted certification “to review defendants’ argument that an overly demanding review resulted in a prohibited hostility to arbitration,” which would render the decision preempted under the Federal Arbitration Act. Kernahan, 236 N.J. at 308. The Supreme Court affirmed, finding that there was no “mutuality of assent” to arbitration. Id. at 320. The Court found several problems with the arbitration provision in support of its decision. First, the arbitration provision was contained in a section of the contract entitled “Mediation” and referred to the AAA’s Commercial Mediation Rules, rather than Arbitration Rules. Id. at 322. Second, “the small size of the print makes the provision burdensome to read and appears to violate the font size requirements of the New Jersey Plain Language Act.” Id. at 322-23. The defendants argued that the provision as a whole made clear that it intended arbitration rather than mediation (e.g., it contemplated the issuance of an award), but the Court found that “[i]t is unreasonable to expect a lay consumer to parse through the contents of this small-font provision to unravel its material discrepancies.” Id. at 326.
Part of the Fall 2019 Class Action Litigation Newsletter available here.