NINTH CIRCUIT RESTORES FTC’S INTERPRETATION OF THE FTC ACT’S COMMON CARRIER EXEMPTION
Harrison (Buzz) Frahn, Andy Hasty, Bram SchumerSimpson Thacher & Bartlett LLP
On February 26, 2018, the Ninth Circuit issued an en banc decision clarifying that Federal Trade Commission (“FTC”) jurisdiction reaches common carriers where they are engaged in non-common carrier activity.FTC v. AT&T Mobility LLC, 883 F.3d 848, 850 (9th Cir. 2018).Agreeing with the FTC, the Ninth Circuit held that the common carrier exemption in the FTC Act is activity-based, not status-based—a conclusion, the Court acknowledged, with “practical ramifications.”Id. at 850-51.In light of the regulatory challenges created by “[t]he transformation of information services and the ubiquity of digital technology,” the Court noted that “[a] phone company is no longer just a phone company” and observed that “[r]eaffirming FTC jurisdiction over activities that fall outside of common-carrier services avoids regulatory gaps and provides consistency and predictability in regulatory enforcement.”Id. at 851.
In 2014, the FTC filed a complaint against AT&T Mobility LLC (“AT&T”) in the Northern District of California, alleging that AT&T’s marketing practices for its unlimited data plans were unfair and deceptive in violation of Section 5 of the FTC Act.More specifically, the FTC alleged that AT&T failed to adequately inform its unlimited data plan customers that AT&T would deliberately slow down the customer’s data speeds once the customer’s data usage passed a threshold set by AT&T in a billing cycle.Important here, the gravamen of the FTC’s complaint was not that AT&T deliberately throttled users’ data speeds, but that the company failed to adequately tell its customers it was doing so.
As set out in the FTC’s complaint, AT&T was the exclusive U.S. mobile data provider for Apple’s iPhone when it launched in 2007, offering all iPhone customers an “unlimited” mobile data plan.See Compl. For Permanent Inj. at ¶ 10, FTC v. AT&T Mobility LLC, 3:14-cv-04785-EMC (N.D. Cal. 2014), ECF No. 1.Three years later, in 2010, AT&T switched to offering only “tiered” mobile data plans, but customers with unlimited data plans were “grandfathered in” and allowed to keep their unlimited plans.Id. at ¶¶ 11-13.Starting in 2011, however, AT&T began throttling the speeds of its unlimited data customers once the customer’s data usage exceeded certain limits set by AT&T during a billing cycle.Id. at ¶¶ 15-18.According to the FTC, this throttling made it difficult or impossible for affected consumers to use web browsing, navigation, and other common apps.Id. at ¶ 20.While the FTC acknowledged that some customers received limited disclosures about the practice, the FTC alleged these disclosures were deficient, e.g., for not informing users of the degree to which their speeds would be reduced, that the throttling was intentional, etc.Id. at ¶¶ 30-35.
AT&T quickly moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), asserting that the common carrier exception in the FTC Act exempted AT&T from the FTC’s jurisdiction.Because AT&T has the “status” of a common carrier, AT&T argued that all of its conduct should be exempt from FTC regulation—even conduct related to AT&T services other than the provision of common carriage.In other words, AT&T argued that Section 5’s exemptions should follow a “status-based” approach, not an “activity-based” approach.
The FTC countered by advocating for an “activity-based” interpretation of the exemption.In the FTC’s view, the common carrier exception only exempted common carriers when they were actually engaged in common carrier services.Throughout the relevant timeframe, and when the FTC filed suit, the Federal Communications Commission (“FCC”) classified mobile data service as a non-common carriage service.Accordingly, as the FTC argued, when AT&T marketed its mobile data services, it was not engaged in a common carrier service and therefore not subject to the exemption in the FTC Act.
The District Court Adopts “Activity-Based” Interpretation
In 2015, Judge Edward M. Chen found in favor of the FTC:“Contrary to what AT&T argues, the common carrier exception applies only where the entity has the status of common carrier and is actually engaging in common carrier activity.”FTC v. AT&T Mobility, 87 F.Supp.3d 1087, 1092 (N.D. Cal. 2015), rev’d and remanded, 835 F.3d 993 (9th Cir. 2016), aff’d on reh’g en banc, 883 F.3d 848 (9th Cir. 2018) (emphasis added).
Looking first to principles of statutory construction, Judge Chen began with the language of the statute itself.While the exemption at issue removes “common carriers subject to the Acts to regulate commerce” from the FTC’s reach, nowhere does the FTC Act define the term “common carrier.”Id.To understand this term, Judge Chen examined what the term meant when the Act was originally passed in 1914.Id. at 1092-93.Prior to passage of the FTC Act, as Judge Chen found, “an entity was deemed a common carrier and regulated as such under the common law only where it was actually engaged in common carriage services.”Id. at 1092.
Judge Chen next turned to the legislative history of the FTC Act, finding further support for a “holistic interpretation” of the common carrier exception.Id. at 1094.Indeed, during congressional debate all those years ago, Representative Stevens, a manager of the House bill, clarified that every corporation
. . . ought to be under the jurisdiction of this commission in order to protect the public, in order that all of their public operations should be supervised, just the same as where a railroad company engages in work outside of that of a public carrier.In that case such work ought to come within the scope of this commission for investigation.Id. (emphasis in original).
Finally, Judge Chen concluded that the practical effects of adopting AT&T’s status-based interpretation would result in “significant regulatory gaps,” agreeing with the FTC that “AT&T’s reading of the common carrier exception would open a giant loophole that would threaten to swallow the FTC Act.”Id.As the FTC argued in its brief, “Companies engaging in de minimis common carrier activity could immunize all of their operations from FTC scrutiny.For example, internet giants that introduce a small measure of common carrier business would be shielded from the FTC’s active privacy and data security enforcement because of their ‘status’ as a common carrier.”Id.
A Ninth Circuit Panel Reverses, Adopting “Status-Based” Interpretation
On appeal a year later, a three-judge panel of the Ninth Circuit reversed.FTC v. AT&T Mobility LLC, 835 F.3d 993 (9th Cir. 2016).In contrast to Judge Chen, the panel found that the plain language of the statute cast the exception in terms of status, not activity.
In reaching this conclusion, the panel relied heavily on linguistic differences between the common carrier exception and another exception in the FTC Act:the packers and stockyards exception.Unlike the common carrier exception, which exempts “common carriers subject to the Acts to regulate commerce,” the packers and stockyards exception carves out “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act.”Id. at 999 (emphasis added).To the panel, the “insofar as” language was “clearly indicative of an activity-based approach”—and the fact that the “insofar as” qualifier was absent from the common carrier exception suggested that Congress never intended an activity-based interpretation.Id.When combined with the fact that the other exemptions in the FTC Act—including the exemptions for “banks,” “savings and loan institutions,” and “Federal credit unions”—were all status-based exemptions, the panel concluded that the common carrier exception “also carves out a group of entities based on status.”Id. at 998.
Sitting En Banc, the Ninth Circuit Affirms District Court and Returns to “Activity-Based” Interpretation
Changing course, the Ninth Circuit released an en banc decision on February 26, 2018 affirming Judge Chen and reverting back to the activity-based interpretation championed by the FTC.FTC v. AT&T Mobility LLC, 883 F.3d 848 (9th Cir. 2018) (en banc).
The Ninth Circuit began with an “important point of civil procedure”—clarifying that AT&T’s Rule 12(b)(1) motion for lack of subject matter jurisdiction was “more properly treated as a Rule 12(b)(6) motion for failure to state a claim.”Id. at 853 (“Although AT&T dispute[d] the FTC’s regulatory jurisdiction, the district court had federal question jurisdiction because the dispute was one ‘arising under’ federal law.”)From there, the Court largely elaborated on and adopted Judge Chen’s original reasoning—finding the statutory language unclear and concluding that the common law meaning of the term “common carrier” at the time of enactment was activity-based.
Going into greater detail than Judge Chen, the Ninth Circuit explored the text and history of the FTC Act and related statutes to better articulate the context of the common carrier exception.As the Ninth Circuit found, the FTC Act was passed “during the heyday of the antitrust movement” by a Congress that “deliberately gave the FTC broad enforcement powers.”Id. at 854.And because the FTC Act was a remedial statute, the Court held it “should be construed broadly to effectuate its purposes.”Id. (internal quotations omitted).The Court then looked to the same remarks by Representative Stevens relied on by Judge Chen, which “highlight[ed] that the FTC had authority over a company engaging in endeavors beyond common carrier work.”Id. at 855 (noting that “Representative Stevens’s comments are entitled to substantial weight . . . given his role as floor manager”).
Unlike the earlier Panel decision, the Ninth Circuit sitting en banc did not find the linguistic differences between the common carrier exception and the packers and stockyard exception conclusive.Id. at 857.Instead, the Court found the Panel had “read far too much into a minor textual change,” concluding that the “insofar as” language “hardly elucidates congressional intent in 1914” as it was “adopted more than 40 years after the FTC Act and more than 35 years after the original packers and stockyards exception.”Id.
Having concluded that “the text and history of the FTC Act do not clearly illuminate the meaning of ‘common carrier,’” the Ninth Circuit next turned to “the common-law meaning of the term at the time the FTC Act was passed in 1914.”Id. at 858.Here, the Court relied heavily on “a consistent line of cases demonstrat[ing] that ‘common carrier’ had a well-understood meaning by 1914.”Id.As the Ninth Circuit found, these cases made clear that “[a] business with common-carrier status acted in its capacity as a common carrier only when it performed activities that were embraced within the scope of its chartered powers.”Id. (internal quotations omitted).Similarly, the Court held that “[c]ases decided after passage of the FTC Act further support an activity-based interpretation”—including Kan. City S. Ry. Co. v. United States, 282 U.S. 760 (1931), which definitively provided that “[t]here is no doubt that common carriers, subject to the Interstate Commerce Act, may have activities which lie outside the performance of their duties as common carriers and are not subject to the provisions of the act.”Id. at 859.
Finally, the Ninth Circuit held that the FTC and FCC are “afford[ed] some deference under Skidmore v. Swift & Co., 323 U.S. 134 (1944),” noting that “the FTC and FCC’s ‘power to persuade’ [was] buttressed by the robust continuum of case law supporting their activity-based interpretation.”Id. at 863.In their briefs, both the FTC and the FCC (as amicus) urged an activity-based approach.Id. at 861-62.Notably, as the FCC asserted, the Court agreed that “the Communications Act and the FTC Act fit hand-in-glove to ensure there is no gap in the federal regulation of telecommunications companies, while also conferring the FCC with exclusive jurisdiction over common carrier services.”Id. (noting that the “regulatory harmony results from the cross-reference between the FTC Act and the Communications Act”).
Although the Ninth Circuit sitting en banc rested its reasoning on principles of statutory construction, legislative history, past precedent, and deference to administrative agencies, the practical consequences of its decision were clearly at the top of its mind.As the Court noted in the introduction:
By holding that common carriers cannot escape the FTC’s reach except when actually engaged in common carrier activity, the Ninth Circuit’s decision addresses an important jurisdictional question and, although nearly four years have elapsed since the FTC filed its complaint, also allows the agency to move forward with its underlying suit against AT&T.
NINTH CIRCUIT IN TRUMP UNIVERSITY HOLDS NO SECOND OPT-OUT RIGHT IS REQUIRED AT THE SETTLEMENT STAGE FOLLOWING MERITS CLASS CERTIFICATION NOTICE
Paul RiehleShartsis Friese LLP
The possibility of a sitting President participating as a defendant in a false advertising trial was avoided following the Ninth Circuit ruling in Low v. Trump University, LLC and Donald J. Trump, 881 F.3d 1111 (9th Cir., Feb. 6, 2018), denying a class member a second opt-out right.Sherrie Simpson sought to opt out of a class settlement after not requesting exclusion following notice of certification on the merits.The Court had little trouble finding that Simpson had Article III standing sufficient to pursue her appeal.Critically, the panel rejected Simpson’s arguments that the merits class notice promised a second opt-out right, finding the notice reasonably construed could not be so read.Relying on decades-old Ninth Circuit precedent, the Court rejected Simpson’s argument that due process requires a second opt-out right.With the class receiving 80-90% of their losses, and class counsel disclaiming a fee, the Court “easily” ruled that the district court did not abuse its desertion in approving the settlement.
Now defunct Trump University was a for-profit entity that purported to teach Donald J. Trump’s “‘secrets of success’ in the real estate industry.”Low, 881 F.3d at 1113.Two class actions were filed in the Southern District of California, each alleging false advertising by luring prospective students to free investor workshops during which they were encouraged to purchase an expensive three-day course.Id. at 1114.During the initial course, defendants allegedly aggressively pressed class members to invest tens of thousands of dollars more for a mentorship program.Id.Each lawsuit alleged material misrepresentations, “including claims that Trump University was an accredited university; that students would be taught by real estate experts who were handpicked by Trump; and that students would receive a year of support and mentoring.”Id.
A class of plaintiffs California, New York and Florida plaintiffs was certified in one case and a nationwide class was certified in the other.Id. at 1115.The district court approved joint short and long form class notices in both cases that was modeled after the notices developed by the Federal Judicial Center.Id. at 1115-16.The notices presented the typical binary choice in a class notice: remain in the class or opt-out.Simpson elected to remain in the class.Id. at 1115, 1119.
The case was set for trial in late November 2016.Id. at 1113.Within weeks after Donald Trump was elected President on November 8, 2016, the parties reached a global settlement with the class members receiving 80-90% of what they paid for Trump University programs.Id. at 1117-18.The settlement precluded any late opt-outs.Id. at 9.Simpson sought to derail the settlement, arguing that the merits class notice and due process required a second opt-out right.Id.at 1117.
The district court found that Simpson lacked standing because she did not have a redressable injury, a point not raised on appeal and rejected by the panel on the basis that the court could provide redress in the form of a second opt-out opportunity.Id. at 1117, n.3.On appeal, plaintiffs argued that because Simpson remained in the class after receiving the initial notice, she failed to demonstrate reliance on the claimed inadequacy of the how the initial notice described her opt-out rights. Id. at 1116-17.The Court of Appeals stated this argument missed Simpson’s point, which was that she was denied a second “settlement stage opportunity to remove herself from the litigation” and so had an interest in the settlement that created a case or controversy satisfying the constitutional requirements of injury, causation and redressability.Id. at 1117.
The Class Notice Did Not Provide for a Second Opt-Out Right
Simpson relied on the following language in the long form class notice promised a second opt-out right at the settlement stage: if “the Plaintiffs obtain money or benefits, either as a result of the trial or a settlement, [class members] will be notified about how to obtain a share (or how to ask to be excluded from any settlement).”Id. at 1117 (emphasis added).
The Ninth Circuit rejected Simpson’s argument for two reasons. First, the Court quoted extensively from the notice and, “reading the notice as a whole and in context,” concluded that it promised only one opt-out right.Id. at 1117-18.The Court found that the language in the notice about “how to ask to be excluded from any settlement” did not “implicitly contain a right to receive what one asks for” (emphasis in original), although that reading was possible.Id. at 1118-19.However, the inference was not plausible that “exclusion from the settlement means exclusion from the class and resurrection of the individual right to litigate.”Id.at 1120.There was no other language supporting that inference in the notice and plenty of statements that class members would give up their individual rights to sue if they did not opt-out by the time given in the original notice.Id. at 1119-20.
The standard for evaluating the notice was what the average class member would have understood.Id. at 1120.The actions of the other class members informed the Court’s decision: Simpson was the only one out of more than 8,000 class members who claimed the notice gave a second right to opt-out.Id.
The Court noted Simpson’s reliance on several cases where class members were allowed a second opt-out opportunity after receiving notice containing the same language as at issue here.However, Simpson failed to show that the second opt-out right was the result of a promise in the merits certification notice, as opposed to the negotiation of the class settlement terms.Id. at 1121, n. 5.
Due Process Does Not Require a Second Opt-Out Right
The Court of Appeals made quick work of Simpson’s argument that due process requires a second opportunity to out-out at the settlement stage, finding that Officers for Justice v. Civil Service Commission of San Francisco, 688 F. 2d 615, 622-23 (9th Cir. 1982) “squarely forecloses this argument.”Id. at 1121-22. While some class action settlements allow a second opt-out opportunity, that is the result of bargaining during the class settlement negotiations, “rather than any due process concerns.”Id at 1121.
The District Court Did Not Abuse Its Discretion in Approving the Settlement
The Ninth Circuit “easily” concluded that the district court “acted well within its discretion” under the “challenging circumstances presented,” noting the unique issues involving a trial against a sitting President.Id. at 1121.Weighing heavily in favor of approval was the compensation to the class, which provided members with “almost a full recovery.”Id.
RISK OF IDENTITY THEFT AS “INJURY IN FACT?” NINTH CIRCUIT RULES CONSUMERS OF ZAPPOS DATA BREACH HAVE ARTICLE III STANDING
Brianna Hendler, Pepperdine University School of LawIntern, Federal Trade Commission
On March 8, 2018, the U.S. Court of Appeals for the Ninth Circuit issued its ruling in In re Zappos.com, Inc., No. 16-16860, 2018 WL 1189643, at 1 (9th Cir. 2018), reversing the lower court’s order dismissing plaintiffs’ suit for lack of Article III standing. The Court held that consumers whose personal information and credit card data was stolen from defendant online retailer Zappos had alleged “injury in fact” sufficient for Article III standing “based on the risk of identity theft,” and despite not having suffered any identity theft or improper use of their information.Id. at 1, 6.
In January 2012, hackers allegedly stole various sensitive consumer information from Zappos servers. Id. at 1. This data had been supplied by 24 million customers in connection with the purchase of merchandise on-line. Id. Information included names, billing addresses, passwords, account numbers, and credit card information. Id. After the breach, Zappos alerted consumers and advised them to change their account password as well as similar passwords used for other accounts. Id. Following Zappos’s disclosure of the breach, plaintiffs filed six class action suits in various district courts, claiming an “‘imminent’ risk of identity theft or fraud” because of Zappos’s alleged failure to safeguard the data. Id. at 1-2. On June 14, 2012, the Judicial Panel on Multidistrict Litigation transferred the suits to the U.S. District Court for the District of Nevada. Id. at 2.
Years later, the District Court separated the assembled plaintiffs into two groups. Id. at 2. The first group “alleged that they had already suffered financial losses from identify theft caused by Zappos’s breach,” while the second group did not claim to have incurred financial losses. Id. The District Court then dismissed the claims brought by the second group, holding these plaintiffs had “failed to allege instances of actual identity theft or fraud[,]” and therefore lacked Article III standing. Id.
Ninth Circuit Takes a Broad View of Injury-in-Fact Standing
The Ninth Circuit reversed the District Court’s decision and remanded for further proceedings. Id. Relying on Krottner v. Starbucks Corp. 628 F.3d 1139 (9th Cir. 2010), the Ninth Circuit held “[p]laintiffs have sufficiently alleged an injury in fact based on a substantial risk that the Zappos hackers will commit identity fraud or identity theft.” Id. at 5.
The Court found four key assertions supported plaintiffs’ standing based on their allegations of substantial risk of identity theft or fraud. First, the Court concluded that the type of data alleged to have been stolen (e.g. names, addresses, passwords, billing information, etc.) was similar to Krottner and thus “plac[ed] [the plaintiffs] at higher risk of ‘phishing’ and ‘pharming[.]’” Id. at 5. Second, although social security numbers were not stolen, as in Krottner, credit card information was stolen, and such information, Court found, is sufficiently sensitive.” Id. This data, alongside other information taken, “still gave hackers the means to commit fraud or identity theft.” Id.
Third, the Court rejected Zappos’s claim “that the data stolen in the breach cannot be used for fraud or identity theft[,]” pointing to the existence of the other plaintiffs in the multidistrict litigation who did incur financial loss resulting from the breach. Id. And, lastly, the Court rejected Zappos’s claim that plaintiffs’ alleged harm was no longer imminent given the length of time that had passed since the filing of the complaint, reaffirming century-old legal doctrine that jurisdiction “depends upon the state of things at the time of the action brought.” Id. (quoting Mollan v. Rottance, 22 U.S. (9 Wheat.) 537, 539, 6 L.Ed. 154 (1824)).
The Court also held that two additional elements of Article III standing were satisfied in Zappos.Id. at 6. First, as to whether the “injury is fairly traceable to the challenged action of the defendant,” the Court held the alleged injury was sufficiently tied to “Zappos’s failure to prevent the breach” for standing purposes.Id. at 6. And, on the issue of whether “it is likely, as opposed to merely speculative, that the claimed injury will be redressed by a favorable decision,” the Court noted “any proven injury could be compensated through damages” and, further, “at least some of [plaintiffs’] requested injunctive relief would limit the extent of the threatened injury by helping Plaintiffs to monitor their credit and the like.” Id. at 7.
The Ninth Circuit, in Zappos, left open the possibility that plaintiffs might not be able to present sufficient evidence to support standing at summary judgment.But, in evaluating the complaint at the motion to dismiss stage, the Court joined a growing number of federal courts finding that Article III standing in consumer data breach cases can be based on the hacking incident itself, not any subsequent illegal activity associated with the use of hacked or stolen data.
NORTHERN DISTRICT OF CALIFORNIA COURT DENIES SECOND BID FOR CLASS CERTIFICATION IN GERBER BABY FOOD LABELING CASE
Elizabeth C. PritzkerPritzker Levine, LLP
Plaintiffs lost their second motion to certify a class of consumers who purchased Gerber baby food products containing allegedly false or deceptive labels that touted the products as an “Excellent Source” or a “Good Source” of various vitamins and minerals; as “Healthy;” or as containing “No Added Sugar” or “No Added Refined Sugar,”—all in violation of the California Unfair Competition Law (UCL), the False Advertising Law (FAL) and the California Legal Remedies Act (CLRA).The case is Bruton v. Gerber Baby Products Company, No. 12-cv-02412-LHK, 2018 WL 1009257 (N.D. Cal. Feb. 13, 2018), pending before Northern District of California Judge Lucy H. Koh.
Plaintiff filed a putative class action complaint against baby food maker, Gerber Products Company (“Gerber”) in 2012, alleging that Gerber’s prepared baby food products were “misbranded” in violation of the UCL, FAL and CLRA. Bruton, 2018 WL 1009257, at *1-2. Plaintiff claimed that Gerber’s nutrition claims on its food products were false, misleading, deceptive or unlawful, to the extent Gerber labeled the products as an “Excellent Source” or “Good Source” of certain vitamins and minerals, were “As Healthy as Fresh,” provided “Nutrition for Healthy Growth and Natural Immune Support,” “Support[ed] Healthy Growth & Development,” and contained “No Added Sugar” or “No Added Refined Sugar.”Id. at *1.
In 2014, Plaintiff filed a motion seeking to certify both a damages and injunctive relief class under the UCL, FAL and CLRA.Gerber opposed the motion.Judge Koh denied certification, finding that neither proposed class “was ascertainable.”Id, at *3.The parties then filed cross-motions for summary judgment.In December 2014, Judge Koh granted summary judgment in favor of Gerber on all of plaintiff’s UCL, FAL and CLRA claims. Id.
In 2017, the Ninth Circuit issued an opinion ruling affirming and reversing in part each of Judge Koh’s rulings.Id, at *3 (citing Bruton v. Gerber Prod., Co. 703 Fed. Appx. 468 (9th Cir. July 17, 2017)).The Ninth Circuit reversed the court’s denial of class certification, because the decision was based on lack of ascertainability and, in the subsequently decided Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017), the Ninth Circuit held that Rule 23 contains no separate “administrative feasibility” (or ascertainability) requirement for class certification.Id.
The Ninth Circuit affirmed the grant of summary judgment for Gerber on plaintiff’s claims that Gerber’s food product labels were deceptive in violation of the UCL, FAL and CLRA.Id. at *3.However, the Ninth Circuit reversed the grant of summary judgment for Gerber on plaintiff’s claims that the labels were unlawful under the UCL, concluding that Judge Koh had erred in applying the reasonable consumer test to the UCL’s unlawful prong, which borrows predicate legal violations, and California’s food labeling law, the predicate violation in the case, incorporates FDA regulations which do not include a reasonable consumer test.Id.
Class Certification Denied for Lack of Ongoing Violation and For Failure to Provide Class-Wide Proof of Damages
On remand, Judge Koh instructed the parties to file supplemental cross briefs on class certification.Id. at *4.Plaintiff again moved to certify two classes:(1) a class of consumers seeking restitution and damages under Fed. R. Civ. P. 23(b)(3), and (2) an injunctive relief class under Fed. R. Civ. P. 23(b)(2).Id. at *5.Judge Koh denied certification of both classes.
Judge Koh’s order addresses the proposed injunctive relief class first.Judge Koh denied certification of a Rule 23(b)(2) class, finding that plaintiff lacked standing to pursue injunctive relief because Gerber had, by the time of plaintiff’s renewed motion, ceased using the label statements on the products plaintiff bought and challenged in the action.Id, at *6.In so holding, Judge Koh distinguished Davidson v. Kimberly-Clark Corp., 873 F.3d 1103 (9th Cir. 2017), a Ninth Circuit case finding that a previously deceived consumer has standing to seek an injunction against false advertising or labeling or a product the consumer now knows or suspects is falsely advertised or labeled, because the consumer may suffer an ‘actual and imminent…threat of future harm” in the future, believing (wrongly) that the mislabeled product may have been improved.Id.Unlike Davidson, Judge Koh reasoned, plaintiff “Bruton does not face an actual or imminent threat of future harm because the source of potential harm, namely Gerber’s mislabeling, has ceased.”Id.
Judge Koh also denied certification of a Rule 23(b)(3) damages class.The court found that the three models for class-wide restitution damages proposed by plaintiff’s damages expert did not satisfy Rule 23’s predominance requirement because they failed to isolate only those damages attributable to Gerber’s conduct.
Judge Koh concluded that the first damages model, a Full Refund Model proposing to refund of the entire amount consumers paid for the product, was improper because it improperly assumed class members received no benefit from the purchase.Id. at *9.This same type of damages model had previously been rejected by courts for the same reason in two, prior food labeling cases, Judge Koh ruled.Id. (citing Werdebaugh v. Blue Diamond Growers, No. 12-cv-02426-LHK, 2014 WL 2191901 (N.D.Cal. 2014), and Brazil v. Dole Packaged Foods, LLC, 660 Fed. Appx. 531, 434 (9th Cir., Sept. 30, 2016)).
The second damages model, a proposed Price Premium Model, compared the price of the identified Gerber products to the price of allegedly comparable products and measured damages based on the premium consumers paid for Gerber products.Id. at *9.But like the first model offered by plaintiff, this model also improperly assumed that any price difference was entirely due to the allegedly misleading statements.“Put another way,” Judge Koh ruled, “the Price Premium Model presumes that the entire price difference between Gerber baby food and a competitor such as Beech Nut baby good is attributable to Gerber’s misleading statements, when any number of factors—such as brand recognition or loyalty, ingredients, and product quality might explain all or part of the difference.”Id.The court concluded:“This damages ‘model’ does not comport with [the requirements of Comcast v. Behrend, 569 U.S. 27, 33 (2013)] that class-wide damages be tied to a legal theory nor can this court conduct the required 'rigorous analysis’ where there is nothing of substance to analyze.”Id (citing In re Pom Wonderful LLC, 2014 WL 1225174, at *3 (C.D.Cal. 2014) (rejecting a proposed Price Premium Model on similar grounds)).
Finally, the third damages model, a proposed Regression Model, estimated damages by comparing the sales of the products at issue before and after Gerber used the disputed labels while controlling for other variables that might explain changes in sales.Id. at *9.The court also found this model deficient, in that it lacked a reliable means for comparing products with and without the challenged label statements, and did not explain how it would account for independent variables that might affect the products’ price or sales.Id. at *10.Complicating the analysis, plaintiff moved for damages based on 69 different baby products, 66 of which “had multiple label iterations with material variations—some labels contained the challenged statements, some did not, and some had only one or different statements in different locations than on other variations of the same product label.”Id. “Though not dispositive in its own right,” the court concluded, “this increased complexity makes it more difficult for the proposed Regression Model to control for all factors and distill the different label variations into the simple before and after comparison the proposed Regression Model seeks to achieve.” Id. “This further reinforces the Court’s conclusion that [plaintiff’s expert] has failed to provide enough explanation for how the variables [in the proposed Regression Model] will be addressed, and thus has failed to satisfy Comcast,” Judge Koh held.
Accordingly, none of plaintiff’s damages models met the threshold for class certification.
Judge Koh’s denial of class certification in Bruton underscores the importance of proper damages modeling to support class-wide damages in certain consumer product labeling cases.Regression models may need to account for variables other than the alleged false label statements – including, for example, supply chain complexity and variability in product labeling – to survive a Rule 23(b)(3) challenge and to satisfy the requirements of Comcast.