Avoiding the Efficiency Trap

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As recently discussed on this blog, the Seventh Circuit – in an opinion authored by Judge Posner – reversed a district court’s denial of class certification regarding claims involving Whirlpool washing machines that allegedly had a defect that caused mold to build up in the machines.  To briefly recap: in that case, Butler v. Sears, Roebuck & Co., Judge Posner rejected two notable arguments:  first, that certification should be denied because Whirlpool had made a number of design modifications, as a result of which different models were differently defective and some not at all, and second, that certification should be denied because most members of the plaintiff class did not experience a mold problem.  As to the first argument, Judge Posner opined that  “Predominance is a question of efficiency,” and concluded that the question of defect could be decided on a common basis and could most efficiently be handled in a class action.  He also concluded that the problem of varying damages could likely be remedied by agreement “on a schedule of damages.”  As to the second argument, Judge Posner concluded that, if “most members of the plaintiff class did not experience a mold problem,” then “that is an argument not for refusing to certify the class but for certifying it and then entering a judgment that will largely exonerate Sears.”  As the prior post on this decision pointed out, Judge Posner’s decision seemed to elevate efficiency concerns over the defendant’s rights and interests.

A recent decision from the Central District of California, In Re Toyota Motor Corp. Hybrid Brake Marketing Sales Practices and Products Liability Litigation, avoids the efficiency trap that ensnared the Seventh Circuit in ButlerIn re Toyota involved the well-publicized claim that certain Toyota vehicle models had a defect in the anti-lock brake system (“ABS”) that caused the ABS to improperly engage when it was not needed, resulting in increased stopping time and distance.  Toyota voluntarily recalled the vehicles and offered to install a software update to remedy the alleged defect.  Nevertheless, the putative class representatives claimed that the braking defect had not been cured and sought damages.  The court denied class certification, finding that common issues did not predominate. 

According to the court, the critical issue – namely, whether there was a defect in the ABS that caused actual injury – could not be accomplished through common proof.  “Most problematic,” the court held, was that “the substantial majority of class members never suffered an actual injury.”  The plaintiffs never contradicted the “substantial evidence” presented by Toyota that its software update had remedied any defect in the ABS. Instead, they relied on the theory that they suffered actual injury because “they would not have paid [the] same purchase price for each of their vehicles had they known of the problem with the ABS.”  (In a separate but contemporaneous order granting Toyota’s motion for summary judgment in Choi v. Toyota Motor Sales, U.S.A., Inc., the judge held that this “benefit-of-the-bargain” argument did not establish actual injury).  The court  concluded that “[m]erely offering a creative damages theory does not establish the actual injury that is required to prevail on their product liability claims,” and went on to hold that “Plaintiffs’ proposal  to certify a class of thousands of owners . . ., then determine which few suffered an actual injury that resulted from a manifest defect in the ABS would render the class action device nothing more than a façade for conducting a small number of highly individualized, fact-intensive cases.”

While the In re Toyota court also supported its predominance analysis in terms of efficiency, it differs markedly from Judge Posner’s analysis in Butler.  Most notably, the In re Toyota court recognized that a class should not be certified where few, if any, putative class members have suffered any injury. Asserting, as Judge Posner did, that a defendant should welcome the certification of a class of largely uninjured individuals because of efficiency ignores the very real pressure on defendants to settle large class actions because of the cost of such actions, as well as the publicity that such actions engender.  As the Seventh Circuit had previously written in Kohen v. Pacific Investment Management Co., 

a class should not be certified if it is apparent that it contains a great many persons who have suffered no injury at the hands of the defendant, if only because of the in terrorem character of a class action.  When the potential liability created by a lawsuit is very great, even though the probability that the plaintiff will succeed in establishing liability is slight, the defendant will be under pressure to settle rather than to bet the company, even if the betting odds are good.

By the same token, the In re Toyota court recognized that certifying classes with large numbers of uninjured members disregards the principle, recognized in cases like Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., that, if proof of the fact of damage requires individualized factual  determinations, the predominance of such individualized issues precludes class certification.  In short, the In re Toyota court acknowledged that efficiency is not the only goal of the class action, and that the class action is not always efficient. And thus it avoided Judge Posner’s efficiency trap.