Class Actions and Mass Litigation Update - June 2012 June 27, 2012
In This Issue

Product Liability Without Personal Injury: Food, Supplement and Other Labeling Claims

By Joanne M. Gray, Richard A. Oetheimer, Nilda M. Tulla-Isidro[1] 


Product liability lawsuits in the food and supplement industry have traditionally arisen in the personal injury context, where the plaintiff generally alleges that the ingestion of the product caused his or her injury. There is a new type of products case on the rise, however, that does not focus solely on personal injury. Instead, plaintiffs’ focus is on alleged misrepresentations made in food and supplement labeling. These lawsuits, often brought under state consumer protection laws prohibiting deceptive conduct, seem to be increasingly attractive to plaintiffs’ counsel because such claims eliminate the requirement to prove causation, thus greatly simplifying the case from plaintiffs’ perspective. Additionally, some state laws do not even require that plaintiffs prove reliance on the allegedly misbranded label, making class action certification significantly less cumbersome.

As plaintiffs begin to increasingly bring these class action lawsuits – which can sometimes result in sizable settlements – food and supplement companies need to become aware of the types of claims brought, their potential defenses and steps that can be taken to avoid these lawsuits. This article provides a broad overview of the types of claims brought in these consumer class action cases, as well as options for responding to such lawsuits.

The Federal Food, Drug, and Cosmetic Act of 1938 (“FDCA”) prohibits the sale or distribution of misbranded foods. Under Section 343(a), a food is misbranded if “its labeling is false or misleading in any particular.”  The term “misbranded” under the FDCA operates as the functional equivalent of “deceptive” under state laws. Traditionally, mass torts have not qualified for class action treatment due to the individual issues surrounding the particular injury and causation of the injury. Claims based on allegedly deceptive labeling, however, may at least arguably be more amenable to class certification, especially if proof of plaintiffs’ reliance on the label is not a required element. Obtaining class certification facilitates plaintiffs’ counsel’s road to negotiating settlements with potentially significant legal fees awarded to class counsel. And defendants face the threat of significant potential liability exposure in statewide class actions.[2] 

Claims Targeted

“All Natural” and “Healthful” Claims

Among the consumer class action claims that plaintiffs bring alleging deceptive labeling, some of the most common involve claims that a food is deceptively labeled as “all natural,” “nutritious,” or “healthful.”  American consumers have been increasingly purchasing products that claim to have “all natural” ingredients. Although the FDA has not specifically defined what foods qualify as “natural,” a 1993 regulation states that use of the term “natural” on a food label is not misleading when “nothing artificial or synthetic . . . has been included in, or has been added to, a food that would not normally be expected to be in the food.”[3]  Warning letters have also shed some light on what the FDA considers “natural.”  For example, in November 2011, the FDA issued a warning letter to Alexia Foods, over its “all natural” claim on a Roasted Red Potatoes & Baby Portabella Mushrooms product, which contained the synthetic chemical preservative disodium dihydrogen pyrophosphate.[4]  The synthetic chemical preservative was an additive that the FDA said “would not normally be expected to be in the food.”[5] 

Lawsuits challenging “all natural” claims frequently involve products containing high fructose corn syrup, alkalized cocoa and factory-made ascorbic acid. For example, plaintiffs sued Snapple Beverage Company because its products labeled “all natural” contained high fructose corn syrup.[6]  Class certification was ultimately defeated in that case because the plaintiffs could not establish a methodology to prove causation and injury.[7]  Similarly, consumers have brought claims against Frito Lay for its “all natural” claims on products containing genetically modified corn or vegetable oil, such as Tostitos and Sun Chips.[8]

Plaintiffs also frequently challenge products claiming to be “healthful” when they contain ingredients such as trans fat, high sugar content, high sodium content and/or artificial colors. In a prime example of such a case, Lam v. General Mills, Inc., plaintiffs challenged the healthful claims made by General Mills on its Fruit Roll-Up snacks. No. 11-05056 (N.D. Cal.). The complaint alleged that, while these snacks were presented as healthful by the company, they in fact contained “trans fat, added sugars and artificial food dyes; lacked significant amounts of real, natural fruit; and had no dietary fiber.”[9]  While the Northern District of California dismissed certain claims – including those challenging use of the terms “fruit flavored” or “naturally flavored” – as preempted, the court did allow the lawsuit to go forward with respect to the plaintiffs’ claim that the statement “made with real fruit” was misleading.[10] 

Another example of this type of claim is the class action lawsuit, settled by Ferrero in January 2011, where plaintiffs claimed that Nutella was falsely advertised under the New Jersey Consumer Fraud Act as a nutritious, wholesome food, despite having high saturated fat and sugar content.[11]

Other Labeling Claims

In addition to claims falling under the “natural” or “healthful” category, class action suits have been brought alleging other types of misrepresentations found on food and supplement labels. For example, in Williams v. Gerber Products Co., 552 F.3d 934 (2008), the plaintiffs argued that the packaging of Gerber’s Fruit Juice Snacks displayed a variety of fruits, but that in reality the only fruit in the snack was white grape juice, and the two most prominent ingredients were corn syrup and sugar. The lower court dismissed the claims because the ingredients were disclosed on the back panel, but the Ninth Circuit reinstated the claims. The plaintiffs in the class action Fishbein v. All Market Inc., No. 11-civ-5580 (S.D.N.Y.), claimed that All Market, Inc.’s VitaCoco coconut water does not contain the amount of electrolytes (sodium, magnesium, potassium) stated on the label, and that it does not hydrate more effectively than less expensive sports drinks despite being labeled “super hydrating.”  The parties have reached a settlement[12] and have a final settlement approval hearing scheduled for August 22, 2012.

Preemption Defense to Class Action Claims

Defendants faced with lawsuits challenging substantiation of their labeling claims have recently been asserting federal preemption as a defense, with some success. The Nutrition Labeling and Education Act of 1990 (“NLEA”), an amendment to the FDCA, prohibits states from imposing “any requirement respecting any claim of the type described by Section 343(r)(1)  made in the label or labeling of food that is not identical to the requirement of Section 343(r).”[13]  In Turek v. General Mills, 662 F.3d 423 (7th Cir. 2011), the plaintiffs’ claims were dismissed as preempted by NLEA. The plaintiffs claimed that the defendants’ labeling for their “chewy bars” should have disclosed that the bars contained inulin (which the plaintiffs characterized as a “non-natural” fiber) and did not contain “all natural” fiber, or that the inulin fiber did not provide that same level of health benefits as natural fiber.[14]  Judge Posner writing for the court held that these claims were preempted because the only statutory requirement in Section 343(q)(1) is that the labeling state “the amount of . . . dietary fiber . . . contained in each serving size or other unit of measure.”[15]  The disclaimers that the plaintiffs argued should be added to the packaging for the inulin-containing bars were not identical to the labeling requirements imposed by NLEA for labeling that mentions dietary fiber; “even if the disclaimers…would be consistent with” the requirements imposed by NLEA, “consistency is not the test, identity is.”[16]  Thus, the plaintiffs’ claims were dismissed as preempted.[17]  Similarly, in Lam v. General Mills, Inc. (supra, n. 11), certain of the plaintiffs’ claims were dismissed as preempted.

As the body of preemption case law concerning food labeling continues to grow, it remains to be seen what state law claims can survive a federal preemption defense.


California is a major player in this growing trend. For the reasons discussed below, a great number of recent consumer labeling class actions have been brought in California.  

Consumer Protection Laws

Currently, many plaintiffs seek recovery under California’s state consumer protection laws, including the California False Advertising Law (“FAL”), Unfair Competition Law (“UCL”) and Consumer Legal Remedies Act (“CLRA”), recognized by some as arguably some of the broadest consumer protection laws in the country. Two recent California Supreme Court decisions have further encouraged these lawsuits by relaxing the requirements for standing under the California UCL. The Court in In re Tobacco II Litigation, 46 Cal. 4th 298 (2009) held that only the class representative needed to establish standing, not all of the absent class members. Additionally, in Kwikset Corp. v. Superior Ct. of Orange County, 51 Cal. 4th 310 (2011), the court held that if the plaintiff purchased a product because  of a deceptive label, that would be enough to establish “injury in fact” for purposes of standing. In that case, the plaintiff had purchased door locks, which were not in any way defective, but were labeled “Made in the USA” even though some components were made elsewhere.

Proposition 65

California has also become a hotbed for consumer class action suits as a result of the state regulation known as “Proposition 65.”  Formally titled “The Safe Drinking Water and Toxic Enforcement Act of 1986,” Proposition 65 requires businesses to notify Californians about the presence of certain chemicals in the products they purchase, in their homes or workplaces, or that are released into the environment. California publishes a list of chemicals that are “known to the State of California” to cause cancer, birth defects or other reproductive harm.[18]  The list contains a wide range of naturally occurring and synthetic chemicals. Businesses are required to provide a “clear and reasonable” warning before knowingly and intentionally exposing anyone to a listed chemical. By law, a warning must be given for listed chemicals unless exposure is low enough, according to the regulations, to pose no significant risk of cancer, or is significantly below levels observed to cause birth defects or other reproductive harm. For chemicals that are listed as causing cancer, the “no significant risk level” (“NSRL”) is defined as the level of exposure that would result in not more than one excess case of cancer in 100,000 individuals exposed to the chemical over a 70-year lifetime. In other words, a person exposed to the chemical at the “no significant risk level” for 70 years would not have more than a “one in 100,000” chance of developing cancer as a result of that exposure. For chemicals that are listed as causing birth defects or reproductive harm, the “no observable effect level” is determined by identifying the level of exposure that has been shown to not pose any harm to humans or laboratory animals. Proposition 65 then requires this “no observable effect level” to be divided by 1,000 in order to provide an ample margin of safety (“MADL”). Businesses subject to Proposition 65 are required to provide a warning if they cause exposures to chemicals listed as causing birth defects or reproductive harm that exceed 1/1,000th of the “no observable effect level.”  Proposition 65 has unfortunately become a bounty-hunter statute and has been widely used by plaintiffs’ counsel to seek recovery. Dietary supplements, in particular, have been the target of a number of recent actions brought asserting Proposition 65 claims.

Responding to Proposition 65 Claims

Defendants may choose to settle these claims rather than risk facing a potentially adverse judgment. These settlements may include monetary fees along with either product reformulation plans or agreements to provide warnings to consumers. These warnings must be made in connection with the sale of each of the products at issue, stating that the product contains a chemical known to the State of California to cause cancer, birth defects or other reproductive harm. Some defendants, however, choose not to settle. Such defendants may argue, for example, that that the testing conducted was incorrect. They may also argue that the chemical in the product was “naturally occurring” based on scientific data and ingredient history, as there have been exceptions for chemicals that are naturally occurring in the product.[19] 


Given the rise in consumer class actions involving foods and dietary supplements, it is likely that these claims will continue to be brought for at least the foreseeable future. To help avoid litigation, companies should be mindful of both ingredients and labeling claims, and should consult counsel regarding proactive re-labeling of products where it may be warranted. When lawsuits do arise, companies will need to consult with counsel and carefully consider potential defenses and settlement options.

[1] Ms. Gray, Mr. Oetheimer and Ms. Tulla-Isidro would like to thank Mary Reynolds, associate at Goodwin Procter LLP, New York, NY, for her assistance with this article.

[2] There is also the potential for nationwide class actions, although differences in state law can be used to oppose such lawsuits.

[3] 58 Fed. Reg. 2302, 2407 (Jan. 6, 1993).

[5] Id.

[6] Weiner v. Snapple Beverage Corp., No. 07-8742 (S.D.N.Y. Aug. 5, 2010).

[7] Id.

[9] Complaint, Lam v. General Mills, Inc., No. 11-05056 (N.D. Cal. Oct. 14, 2011).

[10] Order Granting in Part and Denying in Part Defendant’s Motion to Dismiss, Lam v. General Mills, Inc., No. 11-05056 (N.D. Cal. May 10, 2012).

[11] Glover v. Ferrero USA, Inc., No. 3:11-cv-01086 (D.N.J.).

[12] A proposed settlement of approximately $10 million was filed on February 7, 2012.

[13] Section 343(r) governs labeling other than the required Nutrition Facts panel.

[14] Turek, 662 F.3d at 425-26.

[15] Id. at 427.

[16] Id.

[17] Id.

[19] See, e.g., Brown v. Tri-Union Seafoods, LLC, 90 Cal. Rptr. 3d 644 (Cal. Ct. App. 2009) (affirming judgment in favor of defendant tuna companies on the basis that the methylmercury in tuna is naturally occurring and, thus, does not count toward the exposure to the chemical under Proposition 65).

Recent Civil Rights Decision

Fifth Circuit Recognizes Heightened Commonality Requirement

The U.S. Court of Appeals for the Fifth Circuit recently reversed the grant of class certification in M.D. ex rel. Stukenberg v. Perry, 675 F.3d 832 (5th Cir. 2012). In so doing, it provided a useful example of the ways in which the Supreme Court’s recent Wal-Mart decision strengthened the commonality requirement of Rule 23(a)(2).

In M.D., the named plaintiffs sought certification of a class of children who are or will be in the Permanent Managing Conservatorship of the Texas Department of Family and Protective Services. The complaint alleged that various system-wide problems in the administration of the conservatorship subjected the proposed class members to a variety of constitutional harms. It requested broad declaratory and injunctive relief against the State. The district court granted class certification.

On appeal, the Fifth Circuit found that the district court failed to conduct the “rigorous analysis” required by Rule 23, finding that “the district court’s analysis may have been a reasonable application of pre-Wal-Mart precedent, but the Wal-Mart decision has heightened the standards for establishing commonality under Rule 23(a)(2), rendering the district court’s analysis insufficient.”  The Fifth Circuit could not “identify the scope of the ‘common questions of law’ found by the district court, let alone determine whether they [were] capable of classwide resolution under Wal-Mart.”  The district court also failed to analyze the state’s argument that dissimilarities within the proposed class precluded commonality with specific reference to the elements or defenses of the claims. The common issue in this case was “a somewhat amorphous claim of systemic or widespread misconduct on the part of the defendant.”  As such, the Fifth Circuit held that the district court must be “particularly precise” when explaining how the resolution of those claims will resolve an issue that is central to the validity of each class member’s claims. Having failed to do so, the district court did not perform the requisite “rigorous analysis.”

In addition, the Fifth Circuit found that the district court abused its discretion by certifying a class that lacked cohesiveness under Rule 23(b)(2). Rule 23(b)(2) allows a class action to be maintained when the proposed class seeks specific injunctive relief and the proposed class members have been harmed in the same way. Again looking to Wal-Mart, the Fifth Circuit found that Rule 23(b)(2) applies “only when a single injunction or declaratory judgment would provide relief to each member of the class.”  In this case, the class certified by the district court sought “at least twelve broad, classwide injunctions” that would require the district court to oversee a complete overhaul of the Texas foster care system. In vacating the certification, the Fifth Circuit found that while certain sub-claims could potentially be certified under Rule 23(b)(2), the “amorphous super-claim” could not because some of the underlying claims alleged individual injuries.

Recent Consumer Class Decision

Certification of Class of Facebook Advertisers Denied

The U.S. District Court for the Northern District of California recently denied class certification in an action alleging that Facebook, Inc. breached its advertising contracts by charging advertisers for “clicks” that did not result in any benefit to advertisers. In re Facebook, Inc. PPC Advertising Litig., 2010 WL 1746143 (N.D. Cal. Apr. 22, 2010). The plaintiffs sought certification of a Rule 23(b)(3) class of “all persons or entities in the United States who paid money to Facebook, Inc. for cost-per-click advertising” starting in May 2009. The court held that the putative class did not satisfy the adequacy of representation prong of Rule 23(a) or the predominance and superiority requirements of Rule 23(b)(3).

With respect to Rule 23(a), the court found that the two named plaintiffs had not established that they suffered any concrete injury from “invalid” clicks, or that they had timely disputed their advertising charges. The court thus held that the plaintiffs might be required to litigate individualized defenses that could be dispositive of their claims, which rendered them inadequate class representatives. It also held that the plaintiffs’ interests might differ from those of people who signed materially different advertising contracts. Finally, the court found that one plaintiff was an inadequate class representative because “he testified in his deposition that he knows essentially nothing about the case, and indicated that he would defer to counsel in prosecuting this action.”

The court also found that the class did not satisfy Rule 23(b)(3) because common questions did not predominate with regard to the plaintiffs’ claim that there was a “systematic breach of contract” by Facebook because the plaintiffs failed to establish three key points:  (i) that the allegedly breached contract terms were within the scope of the contract between Facebook and its advertisers, (ii) that there was a uniform way to distinguish between different types of “clicks” on a class-wide basis and (iii) that damages could be calculated on a class-wide basis. Because of the need for multiple individualized determinations, the court also found that a class trial would not be the superior way to resolve the dispute, as required by Rule 23(b)(3).

Recent Consumer Financial Services Decisions

Court Rejects Certification of Class of Borrowers Whose Properties Were Subject to Foreclosure

by Keith E. Levenberg

In Manson v. GMAC Mortgage, LLC, 2012 U.S. Dist. LEXIS 59492 (D. Mass. Apr. 30, 2012), Goodwin Procter assisted its clients GMAC Mortgage LLC and Wells Fargo Bank, as servicer of two U.S. Bank mortgage trusts, in defeating a motion to certify a class of home-mortgage borrowers who alleged that foreclosures performed on their properties were void due to defects in the chain of title to the foreclosing institution.  The plaintiffs relied on a decision of the Supreme Judicial Court of Massachusetts, U.S. Bank N.A. v. Ibanez, 941 N.E.2d 40 (Mass. 2011), which invalidated two foreclosure sales on the ground that the institutions on whose behalf the foreclosure proceedings were brought could not demonstrate that they held the mortgage at the time of the sale.

Before Ibanez, lenders and servicers could rely on a Massachusetts Real Estate Bar Association Title Standard providing that so long as a mortgage is properly assigned to the foreclosing entity, it will be given effect regardless whether it is executed before or after the foreclosure sale.  Ibanez upheld a Massachusetts Land Court decision finding that standard contrary to Massachusetts law.  The original Land Court opinion and the S.J.C.’s decision prompted numerous lawsuits in Massachusetts – most on an individual basis, but some purporting to represent a class ­– based on so-called “Ibanez violations,” challenging foreclosure sales and seeking to return title to the properties to the borrowers who had defaulted on their loans.  An action seeking to address alleged Ibanez violations was also brought by the Massachusetts Attorney General.

In denying the Manson plaintiffs’ motion for class certification, the district court accepted the defendants’ argument that there was no common question capable of driving the resolution of the litigation on a class-wide basis. The defendants relied on language in Ibanez clarifying that a post-foreclosure assignment will not be deemed defective when it merely confirms unrecorded agreements properly assigning the mortgage to the foreclosing entity prior to the sale, and maintained that the question whether such a valid chain of title exists is one that would have to be assessed on an individual basis for each alleged class member. The court agreed, holding that “the determination of whether the statute was in fact violated would require 8,000 highly individualized and case-specific inquiries,” and thus “[t]he glue that purports to bind the proposed class . . . would adhere only after the merits of each case had been fully investigated and only in those instances in which an Ibanez violation in fact was uncovered.”

The decision represents another example of Rule 23(a)’s commonality requirement defeating class certification as a result of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2451 (2011), where the Court held that a common question capable of satisfying Rule 23(a)(2) “must be of such a nature that it is capable of class-wide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” 

Superiority Requirement Not Met in Electronic Fund Transfer Act Suit When Individual Inquiries Required to Determine Whether ATM Users Were “Consumers”

by Adam M. Chud

The U.S. District Court for the District of Columbia recently denied class certification in an action under the Electronic Fund Transfer Act (“EFTA”), 15 U.S.C. §§ 1693 et seq. Ballard v. Branch Banking & Trust Co., 2012 U.S. Dist. LEXIS 80109 (June 11, 2012). In Ballard, the plaintiff claimed that the exterior of one of the defendant’s automatic teller machines (ATMs) did not have a required notice stating that a fee would be charged for withdrawals, even though an on-screen message provided that information. The plaintiff sought certification of a class of individuals who were charged a withdrawal fee while the exterior notice was allegedly missing.

The court denied class certification for failure to satisfy the superiority requirement of Rule 23(b)(3). Superiority was not met for two primary reasons. First, because the EFTA regulates fees charged to “consumers,” individualized inquiries were needed to determine whether each account was a personal (non-corporate) account and whether, even if the account was a personal account, the account was used for personal (non-business) purposes. The court concluded that it was “absolutely essential to communicate with the individuals who used the ATM” to learn this information.

Second, the court concluded that the class members could not be identified because the defendant did not maintain, and was not allowed to maintain, records identifying those who withdrew money from its ATMs or whether any given ATM user was a “consumer.”  Instead, the class members could only be identified by requesting that their banks conduct record searches, which would not be manageable on a class basis. Further, because contact information for the ATM users was not available, class notice could only be made by publication. But given the location of the ATM – in a high-tourist area in downtown Washington, D.C. – potential class members would be highly unlikely to see the notice. This was a real problem because each class member would need to be questioned about whether his or her transaction was a “consumer transaction.”  Because few people were likely to respond to the publication notice and provide this information, the class would “at best, consist of a handful of consumers, or at worst, be a class of one – plaintiff.”

Recent ERISA Decision

Failure to Exhaust Appeals Defeats Adequacy of Representation Requirement

In Tolbert v. RBC Capital Markets, Corp., 2012 U.S. Dist. LEXIS 42974 (S.D. Tex. Mar. 28, 2012), the court declined to certify a putative class action under the Employee Retirement Income Security Act of 1974 (ERISA), finding that the plaintiff was not an adequate class representative under Rule 23(a)(4) because her claim was subject to a non-common ground for dismissal for failure to exhaust administrative remedies. The plaintiff had alleged that RBC improperly “forfeited” the amounts that RBC contributed to the Wealth Accumulation Plan (“WAP”) upon her termination and sought recovery of the WAP benefits allegedly accrued and vested to the participants.

In the motion for class certification, the plaintiff claimed the case turned on the single common issue of whether the WAP was a valid “top hat” plan exempt from certain ERISA requirements. The court refused to certify a class on that basis because that was not an “issue that is central to the validity of each one of the class member’s claims” as required by Wal-Mart. Applying Wal-Mart’s “rigorous analysis” requirement, the court found that the plaintiff’s failure to exhaust the WAP’s appeal process – which was an issue that was central to the validity of her claim but not common to the class – rendered her claim subject to dismissal. Given that prospect, the court found that the plaintiff could not fairly and adequately protect the interests of a class of individuals whose claims might not be subject to that same defense.

Recent Health Care Action

Class of Health Care Providers Rejected for Lack of Common Proof That Claims Should Have Been Paid

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the denial of class certification in an action against State Farm. DWFII Corp. v. State Farm Mut. Auto. Ins. Co., 2012 U.S. App. LEXIS 6183 (11th Cir. Mar. 27, 2012). DWFII challenged, on behalf of a class of Florida health care providers, State Farm’s decisions concerning claims they had submitted for payment.

The Eleventh Circuit affirmed the denial of class certification on several grounds. First, it found that DWFII could not satisfy the typicality requirement of Rule 23(a) because even if State Farm had wrongly failed to pay the entire amount of the invoices on the challenged grounds, each medical service provider would still have to demonstrate an entitlement to reimbursement for the disputed charges, which would require individualized fact finding. For instance, a class member would have to show that the benefits of the insurance plan had not been exhausted at the time of the procedure, the recipient of the medical services had valid insurance coverage with State Farm and the medical service provider actually performed the services for which it charged. Because each class member’s claim would depend upon proof of a unique set of facts and be subject to individualized defenses, a class could not be certified. 

The court also found that the plaintiff could not satisfy Rule 23(b)(2), under which money damages must be incidental to the requested equitable relief. If the proposed class could establish liability, each class member would be entitled to varying amounts of money depending on the services provided, amounts billed and reimbursements made by State Farm. Thus, monetary relief was not incidental to the requested injunctive or declaratory relief, and the class could not be certified under Rule 23(b)(2).

Finally, the court held that certification was improper under Rule 23(b)(3), which requires that “questions of law or fact common to class members predominate over any questions affecting only individual members.”  Because each class member would have to introduce individualized  evidence about the denied claims and the services that had been provided in order to establish liability and damages, the adjudication of these individual fact questions would predominate over the litigation of any common issues. The court denied class certification for this reason as well.

Recent Securities Decisions

No Presumption of Reliance When Causation Between Disclosure and Stock Price Lackin

by Christine E. Mandell

The U.S. District Court for the Southern District of New York recently denied a motion seeking certification of a class of purchasers of Freddie Mac’s Series Z preferred stock in a suit against Freddie Mac’s former CEO Richard Syron and former CFO Anthony Piszel. In re Fed. Home Loan Mortg. Corp. Sec. Litig., 2012 WL 1028642 (S.D.N.Y. Mar. 27, 2012). The plaintiff sued Syron and Piszel after Freddie Mac’s stock price fell after it was publicly called “insolvent” by a former St. Louis Federal Reserve president, and again after Freddie Mac was moved into conservatorship. The plaintiff alleged that Syron and Piszel had misrepresented and omitted material information about Freddie Mac’s underwriting and risk management practices and the adequacy of its capitalization.

In denying class certification, the court found that plaintiff could not establish a class-wide presumption of reliance through a “fraud on the market” theory, without which individual questions about investor reliance on misrepresentations would predominate over common questions. The court stated that the most important factor in determining whether an efficient market exists is whether there is a “demonstration of a cause-and-effect relationship between unexpected, material disclosures and changes in stock prices.”  The court found that this factor was not met because neither of the studies conducted by the plaintiff’s expert could prove the necessary cause-and-effect relationship. Because the plaintiff had failed to show through his expert that the market for Series Z was efficient, no fraud-on-the-market presumption of collective reliance applied, and therefore individual issues predominated over common ones. The court thus denied the plaintiff’s motion for class certification.

No Presumption of Reliance When Efficient Market Did Not Exist

by Jared E. Kaprove

The U.S. District Court for the Central District of California recently denied certification of a putative class of stock purchasers seeking damages for alleged securities fraud. In Dean v. China Agritech, 2012 WL 1835708 (C.D. Cal. May 3, 2012), the plaintiffs alleged that the defendant – a holding company publicly traded within the United States after a “reverse merger” in 2005 – materially misstated its revenue and income for fiscal years 2008 and 2009. The plaintiffs sought to certify a class of purchasers of Agritech stock over a 16-month period, asserting that the stock price had been artificially inflated by the alleged misrepresentations in violation of Section 10(b) of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933.

The court denied class certification because common issues did not predominate. Focusing only on the 10(b) claim, the court noted that the plaintiffs would need to show “(1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation.”  The court highlighted reliance as a significant obstacle to certification because reliance typically requires individual evidence that predominates over common issues.

Although the court recognized that reliance is sometimes presumed, it cited Ninth Circuit precedent holding that proving a fraud on the market requires showing that “the securities were traded in an efficient market,” which requires the court to consider, among other things, “the number of securities analysts following the security” and “the existence of a cause-effect relationship between unexpected corporate news and a change in the price of the security.”  After conducting an extensive analysis, the court held that these factors counseled against class certification. Although the plaintiffs’ expert had stated that 13 analysts followed the stock, the plaintiff could not show that these individuals were in fact qualified analysts. Further, the plaintiffs’ experts could not show a statistically significant correlation between disclosures and price changes. The court therefore held that because there was no efficient market, the plaintiffs could not rely on the fraud-on-the-market theory, and reliance had to be proved on an individualized basis. As a result, the court denied class certification because non-common issues predominated.

Recent Statutory Action

Certification Denied on Predominance Grounds for Claim Alleging Overcharges by Carrier

In a recent decision, the U. S.  District Court for the Eastern District of New York applied Wal-Mart to a proposed Rule 23(b)(3) class and held that common issues did not predominate because the “key issue” was not common. Frey v. Bekins Van Lines, Inc., 2012 U.S. Dist. LEXIS 46412 (E.D.N.Y. Apr. 2, 2012).

In Frey, the plaintiffs sought to represent a putative class of people who claimed to have been overcharged by the defendant Bekins, claiming that the overcharges stemmed from a company policy. The plaintiffs claimed that the defendant – which charged by weight – would initially provide a low estimate, but when generating the final bill would either inflate the true weight or fabricate it, thereby increasing the price. Despite the allegation of a uniform policy, the court looked to the reasoning in Wal-Mart and held that common issues did not predominate. Citing Wal-Mart’s focus on the factual dispute most central to liability (in Wal-Mart, “the reason for a particular employment decision”), the court in Frey refused to certify a class because “[t]he key issue” did not have a common answer. That issue – whether final prices that exceeded estimates were overcharges attributable to the alleged policy – was not common because there could have been other reasons for the disparities. Echoing the language of Wal-Mart, the court summarized its holding as follows:  “Put simply, the reason why any individual shipper’s ultimate cost exceeded the estimated cost is not an issue that is amenable to class treatment.”