No Rubber Stamp: Ninth Circuit Reverses Certification of Nationwide Class Settlement Due to Failure to Account for Variations in State Law

6 February 2018       Authors: David D. Christensen, Matthew N. Lowe

The Ninth Circuit recently clarified in In re Hyundai and Kia Fuel Economy Litigation [1] that district courts must carefully scrutinize class settlements to ensure that they satisfy each of the prerequisites of Rule 23, especially for Rule 23(b)(3) classes, and that courts cannot substitute the fairness of a settlement for the proper certification analysis. Of particular note, the court emphasized the need to analyze whether potential material differences in the applicable states’ laws preclude certification of a nationwide settlement class.

The Hyundai decision arose from multidistrict litigation where the plaintiffs brought state law claims based upon the advertised fuel efficiency of the defendants’ automobiles. [2] Defendants and most plaintiffs agreed to settle the litigation by means of a nationwide settlement class. [3] One group of plaintiffs, however, opposed certification of the settlement class and argued, among other things, that material differences in the applicable states’ laws precluded certification. [4] The district court nonetheless certified the settlement class holding that even if the variations in state law posed an issue if the case were to go to trial, “such an analysis was not warranted in the settlement context.” [5]

On appeal, the Ninth Circuit reversed, finding that the district court was “wrong as a matter of law” by not conducting a choice of law analysis and by not “rigorously analyz[ing] potential differences in state consumer protection laws” before certifying the nationwide settlement class. [6] Specifically, the Ninth Circuit held that analyzing material variations in applicable states’ laws was necessary to assess Rule 23(b)(3)’s requirement that common questions predominate over individual ones and that this requirement “preexists any settlement.” [7] Stated differently, the potential impact of material variations in states’ laws was not simply a trial “management issue[]” that could be ignored for purposes of a settlement class but instead is an issue that could directly impact the predominance requirement, which must be met before certifying any class, in the settlement context or otherwise. [8]

To determine whether “predominance is defeated by variations in state law,” the Ninth Circuit set forth a multistep process, namely: (1) the “proponent must establish that the forum state’s substantive law may be constitutionally applied to the claims of a nationwide class”; (2) “[i]f the forum state’s law meets this requirement, the district court must use the forum state’s choice of law rules to determine whether the forum state’s law or the law of multiple states apply to the claims”; and (3) “if class claims will require adjudication under the laws of multiple states, then the court must determine whether common questions will predominate over individual issues and whether litigation of a nationwide class may be managed fairly and efficiently.” [9] The Ninth Circuit confirmed that the proponent of class certification — typically the plaintiff — bears that burden of “demonstrating through evidentiary proof that the laws of the affected states do not vary in material ways that preclude a finding that common legal issues predominate.” [10]

The Ninth Circuit also rejected the “mistaken assumption that the standard for certification [i]s lessened in the settlement context” and admonished district courts that they “must give ‘undiluted, even heightened, attention in the settlement context.’” [11] The court further noted that the test for certification of a settlement class is not whether the settlement is “fair.” [12]  Rather, the test is whether, after conducting a rigorous analysis, the requirements of Rule 23(a) and (b) are met. [13] This can be a difficult burden to satisfy, especially in a multistate class action. Indeed, as the dissent writes, “the majority … deals a major blow to multistate class actions.” [14]

The Ninth Circuit’s Hyundai decision may act as a double-edged sword for companies defending nationwide class actions. On the one hand, Hyundai imposes a heightened burden on plaintiffs to obtain certification of a nationwide class. On the other hand, the decision may create an obstacle to obtaining final approval of nationwide class settlements (and also encourage and empower objectors), thereby impeding a defendant’s ability to reach a global resolution of claims.

The settling parties in Hyundai have indicated that they intend to petition for en banc review, and thus, the impact of the panel’s split decision is uncertain. [15] We will continue to monitor the case and report on additional developments.

[1] --- F.3d ----, 2018 WL 505343 (9th Cir. Jan. 23, 2018).

[2] Id. at *6.

[3] Id. at *9–10.

[4] Id.

[5] Id. at *11.

[6] Id. at *12.

[7] Id.

[8] Id.

[9] Id. at *4 (internal quotations and citations only).

[10] Id.

[11] Id. at *13–14.

[12] Id. at *12–13.

[13] Id. at *12–14.

[14] Id. at *16.

[15] See In re Hyundai and Kia Fuel Econ. Litig., No. 15-56014, Dkt. No. 98 (9th Cir.).

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No Rubber Stamp: Ninth Circuit Reverses Certification of Nationwide Class Settlement Due to Failure to Account for Variations in State Law