Previously, we advised of a federal district court decision that endorsed a creative option for defeating class certification—the defendant's implementation of a product refund and replacement program providing a comparable remedy to what the putative class might recover in court. James C. Martin & Colin E. Wrabley, Reed Smith Class Action Alert 10-255, Federal Court Holds That Voluntary Refund Programs Can Defeat Class Certification Under Rule 23(b)(3)'s Superiority Requirement (Nov. 8, 2010) (discussing In re Aqua Dots Prods. Liab. Litig., 270 F.R.D. 377 (N.D. Ill. 2010)). That decision highlighted a trend in class action jurisprudence concerning the scope of Federal Rule of Civil Procedure 23(b)(3)'s requirement that class litigation be "superior to other available methods for fair and efficient adjudication of the controversy." The Seventh Circuit recently rejected the district court's conclusion that a refund or replacement program can preclude a finding that class litigation is "superior" under Rule 23(b)(3). In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748 (7th Cir. 2011) (Easterbrook, C.J.). But the Seventh Circuit affirmed the district court's denial of class certification on grounds that the class representatives were not adequate under Rule 23(a)(4), and, in doing so, outlined a potential blueprint for defeating class certification based on similar reasoning.

The District Court in Aqua Dots Adopts the 'Policy' Approach To Construing Rule 23(b)'s Superiority Requirement

As we noted previously, federal courts have divided over the role, if any, that a defendant's voluntary refund and replacement program for an allegedly defective or mislabeled product should play in determining whether class litigation regarding that product is the "superior" method for "adjudication of the controversy," as required for class certification under Rule 23(b)(3). Compare In re Con-Agra Peanut Butter Prods. Liab. Litig., 251 F.R.D. 689, 699-700 (N.D. Ga. 2008) (denying certification where defendants offered refunds to purchasers of potentially salmonella-tainted peanut butter that likely would exceed any judicial disgorgement remedy), with Amalgamated Workers Union of Virgin Islands v. Hess Oil Virgin Islands, 478 F.2d 540, 543 (3d Cir. 1973) ("We find no suggestion in the language of Rule 23, or in the committee notes, that the value of a class suit as a superior form of action was to be weighed against the advantages of an administrative remedy.").

In Aqua Dots, the distributor of Aqua Dots, a craft kit for children, issued recalls of the kits following reports that children had fallen comatose after swallowing beads in the kits tainted with the socalled "date rape" drug, GHB. The distributor simultaneously offered widely publicized refund and replacement options for purchasers and, in fact, provided hundreds of thousands of refunds to purchasers on request. Plaintiffs who purchased Aqua Dots but declined to return them for the promised refund, sought to certify a putative non-personal injury class action. Defendants argued that class certification should be denied because a class action would not be superior to the distributor's private refund and replacement program.

The district court agreed with defendants and denied certification. The court identified the "threshold legal question": "whether a defendant-administered refund program may be found superior to a class action within the meaning of Rule 23(b)(3). . . ." The court acknowledged that as a textual matter, "it makes little sense to describe an out-of-court remedy as an 'adjudication' of a claim." But it nonetheless adopted the so-called "policy" approach to construing the superiority requirement, which looks to whether alternatives to class litigation better serve the "animating purpose of the superiority requirement"—"to ensure that the court's resources are put to efficient use. . . ." Under this approach, the defendants' voluntary refund program was superior to class litigation because "when a defendant is already offering an effective remedy for putative class members through out-ofcourt channels, a class action threatens to consume substantial judicial resources to no good end."

The Seventh Circuit Rejects the 'Policy' Approach but Affirms the Denial of Class Certification Based on the Inadequacy of the Class Representatives.

The Seventh Circuit authorized plaintiffs' interlocutory appeal of the district court's denial of class certification and affirmed. In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748 (7th Cir. 2011) (Easterbrook, C.J.). Judge Easterbrook found that the district court erred in its interpretation of Rule 23(b)(3)'s superiority requirement and its conclusion that a voluntary refund and replacement program could constitute a method for "adjudication" under the rule. "The district court," he noted, had "concluded that the substantial costs of the legal process make a suit inferior to a recall as a means to set things right." Judge Easterbrook acknowledged it was "hard to quarrel with the district court's objective"—"The lower the transaction costs of dealing with a defective product, the better." However, he also concluded, "a district court's conclusion that it has a better idea does not justify disregarding the text of Rule 23."

As Judge Easterbrook put it: "A district court is no more entitled to depart from Rule 23 than it would be to depart from one of the Supreme Court's decisions after deeming the Court's doctrine counterproductive." Plus, it was "not as if the Supreme Court and other participants in the rulemaking process . . . used the word 'adjudication' loosely to mean all ways to redress injuries." Rather, as the Third Circuit pointed out decades ago in Hess Oil Virgin Islands, the Advisory Committee on Civil Rules drafted Rule 23(b)(3) "with the legal understanding of 'adjudication' in mind. . . ." Simply put, "[a] recall campaign is not a form of 'adjudication'" as intended by the Committee or the rule it designed.

"Although the district court's rationale is mistaken," Judge Easterbrook continued, "it does not follow that the court's decision is wrong [b]ecause other parts of Rule 23 give a district judge ample authority to decide whether a class action is the best way to resolve a given dispute." Thus, rather than "departing from the text of Rule 23(b)(3), the district court should have relied on the text of Rule 23(a)(4)," which requires that the class representatives "will fairly and adequately protect the interests of the class." In Judge Easterbrook's view, the class representatives—who "want relief that duplicates a remedy that most buyers already have received, and that remains available to all members of the putative class"—were not adequate: "A representative who proposes that high transaction costs (notice and attorneys' fees) be incurred at the class members' expense to obtain a refund that already is on offer is not adequately protecting the class members' interests."

Analysis

In Aqua Dots, the Seventh Circuit aligned itself with the only other circuit (the Third; see Hess Oil Virgin Islands) to have addressed the "textual" and "policy" approaches to applying Rule 23(b)(3)'s superiority requirement, and rejected an interpretation of "adjudication" that would include nonadjudicatory measures such as product refund and replacement programs. This makes any attempt to use a defendant's refund and replacement program as a ground to defeat superiority a non-starter in the Third and Seventh Circuits, and a taller order in other circuits.

Nevertheless, the Seventh Circuit's holding in Aqua Dots on the inadequacy of class representatives under Rule 23(a)(4) in circumstances where a defendant already has offered a refund and replacement program is a potentially potent tool for litigants opposing class certification in product cases. This is all the more true given the U.S. Supreme Court's recent highlighting in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), of the critical need for courts to ensure that a class representative is adequate. 131 S.Ct. at 2550 (under Rule 23(a)(4), a "class representative must be part of the class and 'possess the same interest and suffer the same injury' as the class members").

Thus far, no court has relied on Aqua Dots in denying class certification on adequacy grounds. But recently, in Sullivan v. DB Investments, Inc., 2011 WL 6367740 (3d Cir. Dec. 20, 2011) (en banc), the two dissenting judges (Jordan and Smith, JJ.), picked up on Aqua Dots' adequacy rationale as a possible ground for denying certification. The two dissenting judges noted that an inadequacy argument could be made in the case before them because "[b]y proposing a class that consists of individuals who have no cause of action under state or federal law, the class representatives have diluted the recovery for those who actually have claims." Citing Aqua Dots, these two judges went on to observe that "the class representatives also unnecessarily incur the cost of giving notice under Rule 23 to individuals who have no right to relief, as well as the cost of compensating class counsel for undertaking unnecessary tasks associated with such notice." Like the Aqua Dots court, the Sullivan dissenters reasoned that "[t]hose costs reduce the total amount of recovery available to the appropriate members of the proposed class (i.e., individuals who may assert an antitrust claim under federal or state law)"—"In other words, a class representative who unnecessarily increases the cost of litigating a class action by including improper plaintiffs in the class definition is at risk of being found to not 'adequately protect the interests of the class.'"

In light of Wal-Mart, Aqua Dots and even the dissent in Sullivan, adequacy challenges to class certification under Rule 23(a)(4) have new legs. While historically adequacy has not been a particularly viable objection to class certification, arguments are now available that take adequacy in a different direction—focusing on the efficacy of the class remedy—and that potentially have widespread application.

This article is presented for informational purposes only and is not intended to constitute legal advice.